The new energy crisis in the pipeline

Welcome to another Energy Source.

The Opec+ oil price boost seems to be fading. International benchmark Brent settled at just over $83 a barrel yesterday, down 2 per cent on the day and leaving it only 4 per cent above its level before the cartel announced its surprise cuts earlier this month. The price is now lower even than just before Opec+ announced its 2mn worth of cuts in October. Less supply for a lower price: ouch!

What’s going on? The possibility of more interest rate rises from the US Federal Reserve, coupled with underlying — and related — fears about recession mean the macro backdrop remains bearish. A number of weak bank earnings reports yesterday triggered a broader sell-off in equity markets too. That’s hurting oil prices despite signs of a resurgence in China’s economy and forecasts for a surge in global oil demand later in the year. And imagine where oil prices would be if Saudi Arabia hadn’t pushed Opec+ to cut supply over recent months.

The relative weakness of oil and gas prices might suggest that the great energy crisis that threatened so much harm to economies in Europe and elsewhere has passed. Maybe. But oil could yet spring a surprise this year. That’s our first note.

Myles picks over the first-quarter earnings from Baker Hughes — and tells us what to expect from the energy sector this quarter. And Amanda takes on hydrogen and the Inflation Reduction Act in Data Drill.

Is this energy crisis over?

Soaring fuel prices in Europe last year threatened economic catastrophe and political disarray.

As my colleagues Shotaro Tani and Laura Dubois reported this week, Europe has defied Moscow’s attempts to induce natural gas shortages on the continent. Storage levels are at their highest level for this time of year since 2011.

“It looks like Europe is going to have too much gas around this summer rather than the other way around,” said Natasha Fielding, head of European gas pricing at Argus Media, in the piece.

The abundance is shocking, considering what might have happened. At one point last year, European natural gas hit a record price of more than €343 per megawatt hour ($100 per million British thermal units). Yesterday, they traded at about €40/MWh, almost 90 per cent lower.

How Europe avoided the worst is now well understood. Demand dropped as energy intensive industries slashed consumption or even shut capacity: a painful form of rationing that will leave lasting scars on the continent’s industrial sector. Supply from the US, Norway and others helped replace Russian energy. Unseasonably warm weather undermined Vladimir Putin’s plan to induce a 1970s style energy shock.

It now seems that, as International Energy Agency boss Fatih Birol told me last year, Russia has indeed “lost the energy battle”. And as we noted in ES earlier this week, even the G7’s price cap on Russian seaborne oil exports seems to be outperforming expectations. Oil prices are about 25 per cent lower than they were a year ago.

But are consumer economies out of the woods? Far from it — at least in the oil market.

Bearish sentiment and price movements based on speculative bets are one thing. And the shape of the oil futures curve doesn’t show much alarm — prices for oil to be delivered months in the future are cheaper than spot prices. But this is a puzzle, because the fundamentals of supply and demand look much more bullish later this year.

Global demand will be 2.6mn barrels a day higher in the fourth quarter than in the first quarter, the IEA believes, as it sets a new annual record well above 100mn b/d. Opec expects the demand jump to be similar, but to happen even more quickly, between the second and fourth quarters.

Neither of these forecasters thinks supply will keep up.

We’ve written repeatedly in recent months about the struggles in the shale patch, previously a swing supplier. But consider that between now and the end of the year, the US’s Energy Information Administration expects the country’s output to rise by less than 100,000 b/d — a fraction of the supply growth rate of the pre-pandemic boom years.

Meanwhile, Opec+ has pledged to cut more than 1mn b/d from its supply from May through to the end of the year. The IEA expects all this to mean that global supply between the first and fourth quarters will rise by just 300,000 b/d or so. If all this holds true, oil will have to be drawn from stocks to match demand.

As prices rise, the US may wish it had a more robust emergency stockpile at hand. The Biden administration first announced its plan to begin depleting the Strategic Petroleum Reserve in November 2021, when Brent crude prices were trading in the mid-$80s and US petrol prices averaged about $3.40 per gallon.

Brent is a couple of bucks cheaper now. And gasoline prices a few cents more expensive. But the SPR — designed for emergencies — is at its lowest level since the early 1980s.

The US will only begin buying crude to replenish the SPR later this year, according to energy secretary Jennifer Granholm. That will be right about the time when analysts expect a tighter market to push crude prices even higher.

In short, one energy crisis — the natural gas shortage — in Europe may have passed, for now. But economic laws of supply and demand have not been vanquished. Fears of recession and worries about demand may be ruling oil prices, but supply is getting short. The second half of the year could be bumpy. (Derek Brower)

Shale patch slowdown

Earnings season is upon us again.

Oilfield services group Baker Hughes kicked off proceedings yesterday, with a better than expected set of results fuelled by its Middle East and liquefied natural gas businesses.

Baker boss Lorenzo Simonelli was bullish, predicting a “double-digit increase” in global upstream spending this year and momentum enduring afterwards too.

“We continue to believe that the current environment remains unique, with a spending cycle that is more durable and less sensitive to commodity price swings, relative to prior cycles.”

Now all eyes will be on the other big international service providers, SLB (the artist formerly known as Schlumberger) and Halliburton, which report in the coming days. Together, these companies act as a bellwether for the oil industry’s mood and health.

Analysts will be watching for evidence of slowing activity in the US shale patch. The rig count has been on the decline for some months as weaker prices forced operators to dial back drilling.

Henry Hub gas prices have climbed a little bit from their recent lows, but at $2.35/mmbtu they remain down 60 per cent since June. And gas drillers are pulling back on rigs and frack crews.

“In North America, activity has been seasonally weaker to start the year as expected, with a high likelihood of further softness as activity in gas basins responds to recent natural gas price weakness,” said Simonelli.

Oil prices have also been shaky in recent months, drifting down towards break-even levels for operators. The recent surprise cuts from Opec+ “removes the more bearish US shale production scenario that concerned investors last month”, noted Chase Mulvehill at Bank of America. But the drop in prices yesterday will have sounded some alarms once more.

The other factor to watch from the big three oilfield services companies is news on their own pricing. Oilfield services inflation has soared over the past year as operators scrambled to locate equipment. But with demand coming off the boil, the price rises in oilfield services have been subsiding.

“There might be some that can push pricing,” said Michael Bradley, a partner at consultancy Veriten. “But I think the pricing increases we have seen over the past few quarters — its going to be very tough to push. So we think pricing goes sideways.”

(Myles McCormick)

Data Drill

A multibillion-dollar debate over the definition of clean hydrogen is heating up as companies and energy groups eagerly await the Biden administration’s ruling.

The IRA included hefty subsidies for clean hydrogen, including a production tax credit of $3/kg that instantly made the US one of the most attractive destinations for hopeful developers.

But the US Treasury needs to decide what the IRA means by “clean” hydrogen. Last week, more than 40 large hydrogen producers, including Air Liquide, Linde and NextEra, wrote a letter to the Biden administration calling for a looser interpretation of criteria in deciding which projects get the tax credit.

For a deep dive on the debate, see this earlier edition of Energy Source. In short, climate advocates argue that clean hydrogen must use renewable energy for every hour of production — without taking it away from existing supply. But some companies and consultancies argue that these measures are costly and could choke the industry before it can scale up.

A report from Princeton Zero Lab released today rejects this trade-off. The report examined competing studies on the tax credit and found that studies calling for a looser implementation had assumed much higher costs for electrolysers and electricity than consensus estimates. When the report adjusted the studies’ findings for outliers, it found that more than half of the studies supported stringent interpretations of hydrogen that were cost competitive.

“What we think this shows is that not only can there be many projects that are competitive right out the gate, [but] even at the most expensive electrolyser costs,” said Wilson Ricks, one of the authors of the report.

Power Points

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Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.