- The head of the International Energy Agency has said that energy prices could rise again this winter, potentially forcing governments to subsidize consumption.
- A combination of China’s economic recovery and a harsh winter in the northern hemisphere has the potential to send energy demand climbing.
- The warning from the IEA echoes the recent message from Germany’s energy regulator that the energy crisis isn’t over yet.
The BBC’s Fatih Birol said that if China’s economic recovery from the pandemic accelerated later this year and the winter in the northern hemisphere was harsher than last year’s, prices would rise. If that happens, governments would need to step in again and subsidize energy consumption, he said. “In a scenario where the Chinese economy is very strong, buys a lot of energy from the markets, and we have a harsh winter, we may see strong upward pressure under natural gas prices, which in turn will put an extra burden on consumers,” Birol told the BBC. What’s more, Birol said he could not rule out blackouts in the winter, which could be “part of the game”. Last month, the head of Germany’s energy regulator issued a similar warning for winter 2023/24. Speaking to local media, Klaus Mueller said the energy crisis in Europe was not over yet and if the winter was cold, supply could fall short of demand. “When it comes to storage (tank) filling, we are now at a different level to last year … But the biggest factor remains the weather,” Mueller said in early June, as quoted by Reuters. “The energy crisis is not over yet,” he added.
China remains the single biggest factor that will influence energy prices for the remainder of the year. So far, its economic recovery has been bumpier than initially expected, and this has led to lower energy prices on world markets.
But industrial activity might yet accelerate with the help of government support, and this would push prices higher for all buyers. Add to this the doubtful likelihood of a repeat of last year’s unusually warm winter and the potential for energy price—and supply—uncertainty rises significantly.
Russian Oil Prices Jump Ahead Of Export Cut
The price of Russian ESPO crude, which goes to China, rose to the highest in seven months as Chinese buyers rushed to buy it ahead of an announced 500,000-bpd cut in exports next month. Per Reuters, ESPO is currently trading at a $4 per-barrel discount to Brent crude, which puts it $6 above the G7 price cap. Before the announcement of the export cut, ESPO was trading at a discount of $4 to Brent crude, still above the price cap. ESPO has been trading consistently above the price cap because it is the preferred Russian blend of Chinese refiners. The ESPO blend is lighter and sweeter than the flagship Urals blend, which has normally traded at a more significant discount to Brent crude. This discount only deepened after the imposition of sanctions on Russian crude exports. Yet even the discount of Urals to Brent has narrowed lately, with the blend last trading at over $55 per barrel, compared with close to $76 for Brent at the time of writing. The trades with ESPO above the price cap suggest that, for months now, Russia has had the tankers and insurance firms to provide coverage and shipping for the ESPO grade, which can reach China from Russia’s Far East in less than a week. Demand is on the rise, too, as Chinese independent refiners get their new import quotas. “The price increase comes as the private refiners have just received new crude imports quotas. They are now out for shopping and Russian oil remains relatively cheap,” an unnamed trader told Reuters. Earlier this week, meanwhile, Russia announced it would further reduce its supply of oil. “As part of the efforts to ensure a balanced market, Russia will voluntarily reduce its oil supply in August by 500,000 barrels per day by cutting its exports to global markets by that quantity,” Russia’s Deputy Prime Minister and top OPEC negotiator Alexander Novak said earlier this week. The announcement came minutes after Saudi Arabia said it would extend its unilateral oil production cut of 1 million bpd into August. Novak went on to say that the cut in exports would also mean a cut in production but Reuters noted in a report earlier this week that Russian oil supply for the international markets would be already lower this month as refineries ramp up after the end of maintenance season. NN: I believe this will be one hell of a trade…