What drives energy and oil markets in 2022 and beyond?

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Many factors are at work at the same time from different economic perspectives shaping the outlook for oil and energy markets in 2022. The world is more uncertain, climate change transitioning serving up its own realistic challenges, geopolitical tensions, as seen many years past, are at the order of the day, and the low investment in oil and gas, since 2015, is ushering in a period of high and rising oil prices. It is the overriding key factor driving the price, of not only oil, but key commodities too.

Commodities require vast amounts of cheap and reliable oil and energy resources to process and distribute it. Economics 101 teaches us that where demand exceeds the sustainable supply, the price will rise.

This is exactly what set in during April 2020 when a new commodity super cycle came into existence. The demand for Renewable Energy (RE) components drive the demand for critical minerals. Even such critical minerals need oil to process and transport them. To add insult to injury, there are not enough critical minerals easily and readily accessible to support an aggressive sustainable transition to RE.

Energy shortages fuel rising costs in all areas of the global economy. All peoples of the world will feel the bite attached to what is now quickly becoming concerns over energy and food insecurity. The world has lost sight of reality when aggressive climate change policies ramped up to support an ideology in which the effects are not fully being understood nor quantified.

An obsession with ideology, which is driven by consensus science, is leading to creating more uncertainty and more complex problems to solve as we move towards achieving the Cop26 and 2050 net-zero goals.

At the time of writing,  US Dollar strength (Dollar Strength) was not evident. Since writing in 2021, about the current commodity super cycle (that formed in April 2020), the million-dollar question remained then what Dollar Strength could do. We have seen both commodities (CRB Index, S&P GSCI Index) and crude oil pulling back. Mainly driven by Dollar Strength amid the sharp rise in US interest rates combined with the US Dollar as safe-haven status. With that, almost all short-dated yields in the USA are now above the long-term US government 10-year yield.

DXY

source: Trading Economics

DXY

source: Trading Economics

What we observe is contributing to the oil-financial market and the oil-physical market moving sharply out of alignment. The fundamentals, as I discuss and point out to them below, remain valid. The reality is the world is short oil and many other key energy commodities. Goldman Sachs, and specifically Jeff Currie, leading Commodity Economist, points out the imbalances that are prevailing in energy markets with the expectation that it will take a long time for supply and demand to be fully back in equilibrium.

Seeking Alpha writes: “Commodities took a dip in June, despite strong performance in the first half of 2022. We believe the outlook for shortened supply is unchanged and may keep commodities in a long-term bull market.”

Eugene van den Berg, May 2022 (updated July 2022)

EvB Market analysis_a

The first big energy shock of the green era

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The first big energy shock of the green era from TheEconomist https://www.economist.com/leaders/2021/10/16/the-first-big-energy-shock-of-the-green-era

Eugene Van Den Berg Oct, 2021

From the above article, The Economist writes:

“Next month world leaders will gather at the cop26 summit, saying they mean to set a course for net global carbon emissions to reach zero by 2050. As they prepare to pledge their part in this 30-year endeavour, the first big energy scare of the green era is unfolding before their eyes. Since May the price of a basket of oil, coal and gas has soared by 95%. Britain, the host of the summit, has turned its coal-fired power stations back on, American petrol prices have hit $3 a gallon, blackouts have engulfed China and India, and Vladimir Putin has just reminded Europe that its supply of fuel relies on Russian goodwill.The panic is a reminder that modern life needs abundant energy: without it, bills become unaffordable, homes freeze and businesses stall. The panic has also exposed deeper problems as the world shifts to a cleaner energy system, including inadequate investment in renewables and some transition fossil fuels, rising geopolitical risks and flimsy safety buffers in power markets. Without rapid reforms there will be more energy crises and, perhaps, a popular revolt against climate policies.”

Over the past 30-years or so, Renewable Energy (RE) wind and solar failed to capture sufficiently enough energy marketshare to have stored off the current global energy crisis notwithstanding vast subsidies.

Contributing to the challenges are the demand for RE component parts stemming from critical commodities like Lithium, Copper, Cobalt and many more, that are used in manufacturing such parts. These commodities too experiencing demand that exceeds supply, and the last few years are only the start of a massive drive to accomplish energy transition goals. What will demand and pricing likely look like over the next few years.

Electric Vehicles (EVs) too showing strong growth and demands more copper and microchips than Internal Combustion Engines (ICEs). Microchip supply chains are under strain and so are the supply chains of other RE core commodities.

 

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