Energy Report: Parabolic Frolic

Natural gas, propane, and oil, to a lesser extent, are on a parabolic frolic, shooting to multi-year highs as the market is coming to grips with just how tight global supplies are. What is becoming a global energy crisis started in China with the shortfall of coal has now spread to natural gas and propane and oil is coming along from behind. China has rolling blackouts and has shuttered some factories, yet despite the evidence, The International Energy Agency (IEA) says that green energy is not to blame.

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The International Energy Agency that famously just a few months ago said that if the world was going to meet carbon goals, it needed to stop investing in fossil fuels right away. They are now saying that the energy transition is not to blame for the explosive energy crisis the globe finds itself in. Reuters reports IEA Agency executive director Fatih Birol said that "It is inaccurate and unfair to explain these high energy prices as a result of clean energy transition policies. This is wrong," he said. In volatile periods, Birol said governments should not lose sight of the goal to limit global warming to 1.5 degrees and avoid the worst impacts of climate change. Birol said prices have been driven up by factors including low levels of gas storage and unplanned outages at production facilities, he said. Maybe someone should remind him that natural gas is a fossil fuel and that the low inventories are low because of underinvestment. 

Birol went on to say that, "Some major suppliers are reluctant to send additional gas in these difficult days to Europe and elsewhere, even though in my view it was an opportunity to underscore that they are a reliable supplier," he added, without naming specific producers. He means Russia! Russia has used natural gas as a political weapon before.

What is becoming a global energy crisis started in China with the shortfall of coal and spread to natural gas and now to propane and oil is coming from behind. China has rolling blackouts and has shuttered some factories. Reuters reports that "China should work to import more coal from Russia, Indonesia, and Mongolia to resolve supply shortages now crippling large sections of industry, said Han Jun, governor of the northeastern province of Jilin, one of the worst-hit regions.

The global energy transition is being challenged as underinvestment in fossil fuels is starting to show up, unmasking the shortsighted rush to get the world off of fossil fuels before we have a viable, reliable alternative. 

The UK found out that when you depend on wind and solar it doesn't work very well. When the wind doesn't blow and the sun doesn't shine, now what. While in the future there may be ways to store that energy, for now, it does not exist in the UK. European gas, power, and carbon prices all hit fresh all-time highs overnight. European gas prices are up 1300% since May 2020 according to Bloomberg.

Henry hub natural gas prices are also soaring and that's even without Joe Biden's carbon tax that he wants to impose. Bloomberg reports that Senate Democrats are developing a carbon-tax proposal that could potentially be used to offset some of the costs of a sweeping social-spending bill as well as direct cash payments to households, according to a key lawmaker. “It’s projected that making polluters pay -- when combined with clean energy tax credits -- would lower the cost of clean electricity for Americans,” Senate Finance Committee Chairman Ron Wyden said in a statement to Bloomberg News Friday. “I’ve worked on this for years, and have continued to develop the proposal as part of my menu of options for the caucus.” A “substantial portion” of the revenue generated from a carbon tax would be disbursed to Americans in the form of cash payments, Wyden said. That could help increase public support for the tax, but would also mean less money to offset the cost of the up-to-$3.5 trillion so-called reconciliation bill.

Fed Chair Jerome Powell is going to be grilled today about the risks of rising inflation and we're starting to see it already at the gas pump and we're going to see it in our heating bills this winter as well. The combination of a Fed policy, massive government spending, and free money is causing inflationary pressures.

But beyond that, we are seeing structural issues in the underinvestment of traditional fossil fuels. That lower for longer for oil and gas was a false premise and that peak demand also will prove to be much further in the future than many had a year ago believed. This is what happens when you allow politicians to make energy policies based on politics instead of science. Europe is learning this and their rash decisions surrounding the energy transition is having a major impact on their economies as well as the health and welfare of their people.

The outages from Hurricane Ida didn't help either as the world has become more reliant on U.S. oil and natural gas exports. Tonight we will get the American Petroleum Institute report on crude supplies. I'm looking for a pretty big drawdown in crude and products but the street is looking for a 2.3 million barrel drop in crude supply and a 1.2 million barrel increase in gasoline and a 1.6 million barrel drop in gasoline supply for both the API and DOE.

These are the type of markets where hedges pay off. For months we've been warning people to be hedged for this particular situation and it has now arrived. We continue to see upside risk though the volatility will be very, very high. If you're not hedged in, you're in trouble.