Don’t expect fuel prices to come down anytime soon

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Welcome to another Energy Source.

Thanks to everyone who wrote in to comment on stranded assets, the topic of Tuesday’s newsletter. We welcome all feedback.

If you haven’t already, go now and read our colleague David Pilling’s Big Read on energy in Africa. Can the continent’s economy grow without fossil fuels? It might be one of the most important questions in global energy and climate policy.

Even with the Saudis ready to re-enter the fray, the import ban on Russian oil announced by Europe this week means that prices are set to continue their rise. That is the focus of the first item in today’s newsletter as we look at the repercussions of the EU deal.

Data Drill highlights the soaring price of raw materials needed in solar — and what this might mean for the bloc’s decarbonisation efforts.

Thanks for reading.

Derek

Oil prices are only going one way after Europe’s import ban

It has been a week of big announcements in the geopolitics of energy.

First came the news that Europe had finally agreed on a Russian oil embargo — subject to carve-outs to placate Hungary — that will ban the vast majority of imports by year-end.

Then came this morning’s news that Saudi Arabia may be ready to increase production.

The two factors will pull oil markets in different directions. But even with the kingdom preparing to open the spigots, a bit, the EU deal means crude’s upward march is set to continue apace — as member states scour the globe for alternative sources of oil.

“We believe the ban will continue a sustained bullish trend for oil markets signifying persistent higher prices for key refined products such as gasoline, diesel, and jet fuel,” said Frederick Lawrence, a partner at Capital Alpha.

The deal struck by the 27 EU member states on Monday bans most Russian imports of crude and petroleum products, but includes an exemption for oil delivered by pipeline.

The carve-out was inserted to placate Hungary, after a lengthy stand-off with Budapest, which had insisted that forcing it to ditch Russian oil this year would constitute a gut punch to its economy. It means Hungary — along with Croatia, Slovakia and the Czech Republic — will have additional time to wean themselves off Russian oil, which is shipped in via the Druzhba pipeline.

Still, the ban marks a huge geopolitical shift. Seaborne imports will be no more. And Germany and Poland have agreed to cut imports from the northern artery of the Druzhba.

It will effectively kill three-quarters of prewar Russian oil exports to Europe immediately, and 90 per cent by the end of the year, according to EU council president Charles Michel. Seaborne imports had already dropped 600,000 barrels a day in March and April, per data provider Kpler, from about 3mn b/d in February.

For more on the nuances of the deal, check out this explainer from my colleagues in London. But the main takeaway, from a markets perspective at least, is that oil is going to continue shifting upwards as European refiners scan the wider world — and shell out whatever is necessary — for alternative sources of crude.

Brent crude, which has been on the rise for weeks, settled at $116.29 a barrel yesterday, up 69 cents. West Texas Intermediate, the US marker, was up 59 cents to settle at $115.26 a barrel.

Tonight #EUCO agreed a sixth package of sanctions.

It will allow a ban on oil imports from #Russia.

The sanctions will immediately impact 75% of Russian oil imports. And by the end of the year, 90% of the Russian oil imported in Europe will be banned. pic.twitter.com/uVoVI519v8

— Charles Michel (@eucopresident) May 30, 2022

For its part, Russia has insisted it can turn its gaze east and redirect supplies to more friendly importers including China, India and Iran. But there are big question marks hanging over the volumes that these countries can suck up, even with the hefty discount on Urals blends.

So far, these redirections have allowed Russia to keep its output up, with no material net decline in loadings. Wellhead production was up between 200,000-300,000 b/d in May, after a 1mn b/d slide in April, according to S&P Global Commodity Insights. That is set to change.

“Despite the resilience so far, we believe significant Russian supply losses are coming,” said Shin Kim, head of supply and production analysis, at S&P. “The military conflict continues to worsen and is looking increasingly prolonged.”

Winners and losers

As Europe looks to plug the gap, it is already turning to the Middle East and west Africa. Saudi Arabia and Nigeria look set to be among the big winners as refiners snap up barrels.

Traders are braced for a jump in Middle Eastern official selling prices. Saudi Arabia has already suggested it may raise July prices for all crude to Asia by $1-$1.50 a barrel.

The losers in all this will continue to be consumers, who are already battling sky-high petrol prices. In the US, the price at the pump has soared to fresh records in recent days as holiday makers took to the road last weekend at the beginning of the American driving season. The average price of a gallon of gasoline was $4.67 yesterday. In California, prices are well over $6.

With the Biden administration’s frantic scramble for more crude supply failing to yield much in the way of results, consumers’ best hope at this point could well be that sky-high prices cause demand to slide. (There are already some signs that this process has begun, as I wrote at the weekend). 

“Demand destruction may be one of the only viable market relief valves remaining,” said Lawrence at Capital Alpha. “The new oil market is in its early innings.”

(Myles McCormick)

Data Drill

Rising costs for solar threaten the EU’s plan to wean itself off Russian fuel, says a new analysis by Wood Mackenzie.

Last month, Brussels announced plans to double its solar capacity by 2025 and install 600 gigawatts by 2030 as the “kingpin” of its REPowerEU strategy to end energy dependence on Russia.

But soaring prices for raw materials such as polysilicon and the lack of a strong domestic supply chain are pushing up the cost of solar modules and threatening the EU’s targets, says Wood Mackenzie. Prices for modules increased 30 per cent last year and continue to remain above pre-pandemic levels.

“As more sanctions are on the way against Russia, and with electricity and fuel prices showing no sign of slowing down, Europe needs to navigate this high price environment and act fast to develop a local solar supply chain to achieve its targets,” said Theo Theodorou, a senior analyst at Wood Mackenzie.

Wood Mackenzie estimates that in order to achieve its REPowerEU goals, Brussels needs to produce three times more polysilicon, 20 times more semiconductor wafers, 42 times more cells, and six times more modules. (Amanda Chu)

Power Points