A few months ago, the prospect of a commodity and energy supercycle was seen as something likely to happen. Now we know it’s there. And it’s hurting everyone.
As we gradually came out of the COVID-19 pandemic, or at least learned to live with it, we collectively realized that inventories of everything were low and that the global supply chain was broken. Commodity prices had jumped of an average of 30% between January 2020 and August 2021 in an environment where inflation was mostly contained.
WHEN THE GOING GETS TOUGH
Since then, things have deteriorated. The pandemic created a drop in energy demand and corresponding cuts in fossil gas and oil production. As the economy started to regain momentum, the slow response of most of the energy producing countries, and the decision to first refurbish their own stocks for others, caused a supply-demand imbalance which further stressed the global supply-chain crisis. The reasons were different, but everyone got hit:
- China is facing its worst energy crisis in decades, in large part followed by the decision in 2020 to stop importing coal from Australia, causing shortages and driving up costs for gas and electricity. This created unseen surges in all the energy-consuming manufactured products, from fertilizers to metal (which are ironically increasingly required for the energy transition)
- India has experienced a severe coal crisis with severe power outages forcing the government to redirect coal from industries to power plants, with all the impacts one can imagine
- Limited production from the OPEP+ countries have also notably contributed to drive up the cost of energy in the US, to the point that more of 50 million barrels have been released from the Strategic Petroleum Reserve
- Europe was and still is the most impacted region for a number of reasons:
- Less oil supply from the US, Russia and Norway
- Less power generation from green resources because of adverse climatic conditions
- Limited gas exports from Russia because of high domestic demand,
- Anticipated stop in production of the largest European natural gas field (Groningen, The Netherlands)
- The soaring price of carbon, in part because of the expected scarcity in the light of the net-zero objectives ( there’s an interesting article by Euractiv on this)
- A very strong LNG demand in Asia
- And of course, Russia’s invasion of Ukraine, which is likely to dramatically worsen the energy crisis as many European countries (EU members or not) are very dependent on Russian gas.
It took (too) long a time to wake-up but governments have come to realize that the energy transition is not only meant to rein in climate change but also to avoid the longest-lasting energy crisis we ever had and its devastating consequences on the world economy. There is now an acute understanding that being energy-dependent from other countries is not a sustainable economic model. Ursula von der Leyen, President of the European Commission, made a statement that left no room for misunderstanding
“Europe today is too reliant on gas and too dependent on gas imports. The answer has to do with diversifying our suppliers… and, crucially, with speeding up the transition to clean energy.” – Ursula von der Leyen, President of the European Commission
The transition to green and local energy is accelerating. More and more renewable energy generation projects are launched. Technology allows better output, they are bigger in size and, with the expected progress in batteries, less dependent from cloudy skies, slower winds and low rainfall. The carbon certificates that they allow to create are also fueling a dynamic market that can only become more and more important.
This transition will not be immediate. For a long period of time, we will still largely rely on fossil fuel and be massively impacted by its price fluctuations and increased volatility. For companies that are buying and/or manufacturing goods from commodities, for those who are green or traditional energy producer or consumers, there is no other choice but to be prepared for fluctuating markets and to have the right solution to hedge costs, lock margins and manage the risk inherent to commodity, energy, and carbon markets.
If any of this resonates with you, talk to us. We can help.