Global Economy and Energy Markets Weekly Commentary – 31st Oct ‘21

Christof talks about oil prices as concern is increasing that global growth (and therefore demand) may not stabilise at the high levels that we have seen this year and that long-term growth could even be at below the pre-pandemic trendline. At the same time, we’re also seeing improvement in oil supply from places like Brazil and, potentially, Venezuela, so the price outlook has become a bit more moderate. An oil price of $85 might be unsustainable going into the spring. We might drop back $10-$15 and then, possibly, see renewed excitement again.

He further discusses whether the market believes that Russia will supply more gas. The markets took that message from Putin very seriously – that the Russian government is still able and willing to force its companies to redirect gas to where it’s not necessarily the most profitable, even if at the expense of domestic storage. The recent gas price surge has happened because of immediate demand, supply factors but there are also two structural changes taking place. One is the whole impetus of climate change, which increases demand for gas while coal use drops. And secondly, gas has really become a globalised fuel – it’s an LNG game now with places like China and Europe increasing their imports. Last year was the first time interregional LNG trade exceeded point to point pipeline trade. This kind of liberalisation and flexibility is more sensitive to fluctuations, if not contained by policy.

On the return of the Iranian oil to the market, we will see renewed emphasis on the talks. The Biden administration needs to show success urgently with things slipping domestically and Europe has always been in favor of settling the situation with Iran. Iran, on its part, realises that the clock is ticking with a growing regional alliance pointing against it. But on the oil front, a lot is already being sold to China and India, so the sanctions are biting less. And even if more oil is allowed, it won’t be a big chunk and probably only come around the summer.

Christof also reveals what would be on his wish list to be achieved at COP 26. It’s a mistake to think fossil fuels can just disappear or to make them as expensive as possible to encourage more use of renewables. In fact, without plenty of fossil fuels, there will be no transition because companies need that revenue to afford to invest in cleaner solutions. We also need a global carbon price. So far, we only have serious carbon prices in Europe and California, and this is not expected to change fast. Lastly, we need to realise that the decarbonisation pledges made by more than 100 companies cannot be realised without offsets, and this promises to be the biggest and most fraudulent market that ever existed. There are many different interests at work, and it won’t be easy to come up with a quick fix for regulation.

He is joined by Adi Imsirovic, Senior Research Fellow, the Oxford Institute for Energy Studies. Dyala Sabbagh from Gulf Intelligence moderates the discussion.