Here are some key energy issues traders should be aware of as energy markets continue to show extreme volatility:
1. Will the skyrocketing energy costs in Europe change the European energy market?
European Union leaders are now coming to terms with the fact that skyrocketing prices are making energy costs too high for consumers. The President of the European Commission, Ursula Von der Leyen, said Recently that the European energy market no longer works under current conditions and that emergency intervention is needed, specifically to decouple the price of energy from the price of natural gas.
Under the current design, the price of electricity is determined by the price of the most expensive fuel used to meet demand on a given day. The idea behind this pricing scheme was an objective to promote the use of renewable energies, which in Europe are cheaper than fossil fuels. However, European countries still rely on fossil fuels to meet demand, and the increase in natural gas prices has caused electricity prices to reach 600 euros per megawatt hour in intraday trading.
Most European countries advocate a cap on natural gas prices, but this would only lower prices for consumers. Someone, probably European governments, would still have to cover the difference if they plan to supply natural gas for electricity to their economies. (Currently there is no other alternative to cover energy needs unless we see blackouts).
One idea, which Poland supports, is to cap EU Emissions Trading System prices. European power generators that burn fossil fuels must buy carbon offsets at prices determined by the trading system to offset the carbon these fuels emit when burned. They are currently quoted at 90 euros/ton. Poland suggests that a cap of €30/tonne could help bring prices down. I would say that Europe should suspend this system entirely for the duration of this energy crisis, that Ben van Beurden, the CEO Shell believes it could last for years.
2. How will the European energy crisis affect other raw materials?
The geopolitical crisis in Europe has already hit grain markets, as both Russia and Ukraine are major wheat exporters. However, we are now seeing the energy crisis spill over into other commodities.
For example, production is shrinking in Europe due to energy costs and fuel rationing. Alcoa (NYSE:), a major US-based aluminum producer, Announced that it is cutting output at its Lista smelter in Norway by a third because the price of energy to run that smelter is too high. this comes on top reductions on the scale of 500,000 tons during the past year. Aluminum is a particularly energy-intensive substance to produce, making it more vulnerable to energy price spikes.
The price of fertilizers it is also increasing, in part because some of the raw materials used to make fertilizers are derived from natural gas. Fertilizer production has also been reduced in parts of Europe due to high prices and a lack of raw material. This will have repercussions on other commodity markets that rely on fertilizers for production.
3. Will OPEC+ reduce production at its meeting on September 5?
After Saudi Arabia’s oil minister, Prince Abdulaziz bin Salman, roiled oil markets with his final week, traders are wondering if the group will push for a production cut next week. I see it as unlikely because OPEC+ will probably not be able to restructure its production quotas in a new agreement next Monday. This will most likely happen later this year, perhaps at the November meeting.
The group will most likely leave the fees unchanged. Traders should remember that OPEC+’s actual production rates are more relevant than their quotas to oil prices at the moment, because many member countries are producing below their quotas. In fact, many are unable to meet their quotas.
Looking ahead, however, OPEC+’s Joint Technical Committee (JTC) has just issued a report forecasting a 100,000 bpd increase in excess supply by 2022. The committee now expects the market to see an increase of 900,000 bpd. average surplus this year. The JTC’s assessment of the physical oil market could provide some clues as to whether OPEC+ will cut production quotas in the future. Traders should keep an eye on future JTC reports as well as OPEC’s official 2023 supply and demand forecasts for signs of whether or not the group plans to cut quotas.