It was only a matter of time, really. In a globalized world, energy crunches can hardly remain regionally contained for very long, especially in a context of damaged supply chains and a rush to cut investment in fossil fuels.
The energy crunch that began in Europe earlier this month may now be on its way to America. For now, all is well with one of the world’s top gas producers. US gas exporters have enjoyed a solid increase in demand from Asia and Europe as the recovery in economic activity pushed demand for electricity higher. According to a recent Financial Times report, there is a veritable bidding war for US cargos of liquefied natural gas between Asian and European buyers – and the Asians are winning.
Coal exports are on the rise, too, and have been for a while now, especially after a political spat had China shun Australian coal. But supply is tightening, Argus reported earlier this month. In July, according to the report, US coking coal exports dropped by as much as 20.3% from June. The report noted supply was constrained by producers’ limited access to funding and a labor shortage that has plagued many industries amid the pandemic.
All this should be good news for US producers of fossil fuels. But it may easily become bad news as winter approaches. The Wall Street Journal’s Jinjoo Lee wrote earlier this week high energy prices could be the next hot import for the United States. Lee cited data showing gas inventory replenishment was running below average rates for this season, and gas in storage in early September was 7.4% below the five-year average.
Coal inventories are also running low because of stronger exports, with prices for thermal coal three times higher than they were a year ago. According to calculations from the Energy Information Administration cited in the WSJ report, coal inventories in the United States could fall to less than half last year’s inventory levels by the end of the year. Last year, energy demand was depressed because of the pandemic. This year, the US economy is firing on all cylinders once again.
No wonder electricity prices are already going up.
In a way, the events in Europe could be seen as a trailer of what might happen in the United States. It is a trailer because it shows all the worst bits. The United States is much more energy independent than, say, the UK, and that’s a big plus. Yet exports bring in revenues, and it would require government intervention to make gas producers cut exports.
In an alarming move, such intervention was requested last week by a manufacturing industry group. Industrial Energy Consumers of America, an organization representing companies producing chemicals, food, and materials, asked the Department of Energy to institute limits on the exports of liquefied natural gas in order to avoid soaring prices and gas shortages during the winter, Reuters reported on Friday.
Opinions seem to differ on whether rising LNG exports are in fact hurting US consumers. But the fact is that gas prices are already double what they were a year ago. According to the IECA, they are not, however, high enough to motivate a ramp-up in natural gas production. Therefore, in order to stockpile enough gas for the winter, the US government must force a reduction in exports.
The LNG industry is, of course, against this. The executive director of Center for Liquefied Natural Gas told Reuters most LNG exports are shipped under long-term fixed-price contracts that have no relation to benchmark gas prices and their movements. Yet some cargos are sold on the spot market.
“Buyers of LNG who compete for natural gas with U.S. consumers are state-owned enterprises and foreign government-controlled utilities with automatic cost pass through,” Paul Cicio, president of IECA, said, as quoted by Reuters. “US manufacturers cannot compete with them on prices.”
Traders are already getting jittery, and this will likely contribute to price uncertainty; regardless of how the fundamentals situation develops. Again, Europe is at the heart of the uncertainty – or rather the certainty that prices have higher to climb. But now, China has added to concern about gas supply and the potential for shortages.
For now, China’s biggest problem seems to be coal rather than gas. A recent Bloomberg report said that China coal power plant operators are struggling to buy enough coal to keep their plants running, and some are being forced to shut down their boilers because of insufficient coal supply. This, however, might lead to stronger gas demand to ensure enough electricity and heating for the winter. This will further exacerbate the difference between global demand and supply.
The European energy crunch is spilling over into other regions. The blame game has begun with culprits ranging from years of underinvestment in local gas production to a Gazprom scheme to get Nord Stream 2 approved by Germany. For now, it is still unclear how much of the price surge is due to a gap between demand and supply and how much of it is due to market nervousness, at least according to RBC commodity strategist Christopher Louney, as quoted by the WSJ’s Lee. This question is less important than another, however, and it is a scary one:
International ratings agency Fitch has improved its forecast for Russia’s economic growth this year to 4.3% from the previously expected 3.7%, said Douglas Winslow, Director at Fitch Ratings.
According to the agency, the higher GDP growth is expected as a result of legislative reforms aimed at removing structural restrictions on growth while maintaining macroeconomic stability. Fitch analysts also pointed to a significant strengthening of the budget and external accumulative buffers due to consistently high oil prices and other revenues.
Fitch has maintained its forecast for Russia’s GDP growth of 2.7% in 2022 and 2% in 2023.
Inflation in the country is expected to hit 6% this year, 4.2% in 2022 and 4% in 2023, Fitch said. The key central bank interest rate will grow from the current 6.75% to 7% this year, according to the forecast. The agency’s analysts expect the rate to be reduced to 6% in 2022, and to 5.5% in 2023.
Among the negative factors affecting the growth of the Russian economy, the agency named the introduction of additional Western sanctions, which undermine macroeconomic and financial stability. Fitch also noted the increasing impact of oil price volatility on the Russian economy and the deterioration of the sovereign balance of payments, including liabilities growth in the large public sector.
The Chinese economy is expected to maintain its recovery over the rest of 2021 thanks to the country’s strong exports, according to research by the Asian Development Bank (ADB).
ADB reiterated its April projections for the nation’s economic growth, predicting that China’s GDP will rise 8.1% this year and 5.5% in 2022.
According to Dominik Peschel, head of the economics unit at ADB, net exports will contribute more to China’s economic growth in 2021 than the bank had previously expected. He said consumption will continue to be the major driver for China’s economic growth both in 2021 and 2022.
The bank has also lowered its inflation forecast for 2021 to 1.3%, noting that the country’s consumer price inflation will stay well below its 2020 level.
Poland’s energy company PGNiG will not have the right to veto the certification of Russia’s Nord Stream 2 gas pipeline, says German energy regulator Bundesnetzagentur (BNetzA).
The Warsaw-based firm, however, will get an opportunity to muster the arguments during certification proceedings of the widely-debated pipeline, the watchdog said as quoted by TASS.
“The Federal Network Agency gave a positive response to the applications of PGNiG SA and PST GmbH over their participating in the certification process,” head of the regulator’s media and public relations department Fiete Wulff told the agency.
“The parties involved can participate in the administrative process, in particular, they have the right to state their point of view. The parties involved do not have the right to veto,” Wulff added.
The Polish state-controlled energy company submitted a request for participation in the certification procedure for the Gazprom-run enterprise in August, claiming that the Russian energy giant didn’t want to comply with the EU energy regulations. PGNiG accuses Gazprom of avoiding “application of requirements concerning ownership unbundling”, thus jeopardizing the competitive environment in the EU energy market.
Earlier this month, Gazprom announced the completion of construction works on the Nord Stream 2 pipeline, running from Russia to Germany through the Baltic Sea. However, the company is still awaiting European certification confirming that the pipeline meets EU technical regulations to start gas deliveries.
The pipeline is also to be registered as an ITO with Germany’s federal network agency (Bundesnetzagentur), which has until January 8, 2022 to issue certification.
According to EU law, the agency cannot officially ban gas pumping, but if it starts before the necessary registration procedures are completed, the operator of Nord Stream 2 AG would face fines.
The Nord Stream 2 pipeline, which is set to boost annual deliveries of Russian natural gas to Germany by up to 55 billion cubic meters, has encountered numerous roadblocks with Poland standing as one its most vociferous opponents.
