Years of weak basin investment in the oil (and more gas) sector is building into a global supply crisis. Recent OPEC decision at 400kbbl p / d (and OPEC reversing production from 7m bbls p / d) alleviates some fears, gas situation is different. When it comes to gas, new supply is only expected in the middle of this decade.
The EIA estimates that investment in oil and gas has dropped by 33% due to the COVID-19 outbreak and this has led to a shortage of supplies. One obvious example is the Permian Basin and the American Shale Industry. This is declining due to lack of investment.
The good news is that gas production can increase relatively quickly by focusing on more efficient technological advances and short-term projects. If this is to happen, a significant increase in production will be needed to ensure that sufficient profits are exported from the United States. As one would appreciate, this situation has a lot of’ifs’ to make it comfortable in the current context of European gas markets.
At a time when things are stagnant, European gas reserves do not look ready for the cold winter. The stock is at its lowest level in a decade, which is why prices are rising. On the other hand, the world’s largest importers (China, Japan, South Korea, Taiwan) have already bought gas.
Asian importers don’t seem to want to make a mistake last winter. This could lead to a silver lining if Asian imports meet their demand at the beginning of the year and provide sufficient supply for re-exporting to Europe. For 13 years, gas prices in Europe seemed to be so high.
If European utilities compete for a limited supply (primarily LNG), prices will continue to rise. This can almost certainly be passed on to consumers. Another factor to consider is Asia’s demand for gas, and its ability to pay premium, allowing even European utilities to compete. There is only so much that can be passed on to consumers who have experienced an increase in energy prices in the past.
So what does all this mean? Well, if it is long and short, if there is no easy winter or demand is not easy, EU resources should look for alternative energy sources to meet the demand.
While most “alternative energy sources” may read as “renewable”, the energy market may have an alternative meaning – coal. Under the current market conditions, coal is the most economical source of oil, and its relative market availability is “better” than natural gas. It should be seen how the increase in carbon emissions and consumer sentiment in European utilities is proportional to the lack (or lack of capacity) of deep carbon sources.
Unfortunately, there are currently not enough generations to meet the high demand for cold winters. It is also impossible to create enough generations in the limited time to meet this need.
In the next three to four months, all industries will be hit by a series of power outages that could lead to unintended consequences.
Slava Krishna is the global energy director at DWF