Uneven Balances and OPEC+ Resolve to Remain
Key Risks to Markets
- Coal, Gasoline Entering Peak Demand
Years -
NEW
YORK and LONDON and
SINGAPORE, Dec. 14,
2023 /PRNewswire/ -- Analysts at S&P Global
Commodity Insights, the leading independent provider of
information, data, analysis, benchmark prices and workflow
solutions for the commodities, energy and energy transition
markets, today released their latest 2024 energy outlook.
OVERVIEW
After years of turbulence, global markets are still striving to
find sustainable balance between energy supply and demand. A
decelerating macroeconomic framework is adding headwinds to already
slowing energy demand growth, while geopolitical events in several
regions either reduce energy supply or raise the risks of supply
disruptions.
For oil markets, an extended period of elevated crude prices
hastened investment and activity outside of OPEC+, with production
growth accelerating robustly, particularly in the United States, creating an unclear future
for supply cuts within OPEC+.
Kurt Barrow, Head of Oil
Markets, S&P Global Commodity Insights, said: "Strong
non-OPEC+ supply growth and slowing oil demand growth have led OPEC
and its allies to curtail output and support prices. While this
tactic has achieved some success, maintaining discipline among
member countries may be difficult in 2024 as the loss of market
share continues and non-OPEC+ volumes increase. OPEC+'s ability to
follow through on voluntary production cuts will be key to crude
pricing over the next year."
While global gas markets have managed to adjust to sharply lower
Russian gas supply, particularly to Europe, demand remains constrained due to high
prices and the macroeconomic slowdown.
Global coal demand, which saw stout growth in 2023 due to
underperforming hydro generation in China, is set to see slower growth or demand
decline in 2024.
Philippe Frangules, Head of
Gas, Power & Climate Solutions, S&P Global Commodity
Insights, said: "Looking ahead, gas consumers in Europe and Asia remain exposed to shortages if winter
weather proves to be cold, and liquefied natural gas (LNG)
logistics will be key to meeting regional demand. Similarly, coal
producers are faced with rightsizing their output and flows this
year, as pockets of demand strength remain in developing countries
even if global demand is past its peak. Prices for both gas and
coal should ease in 2024 barring unforeseen events."
Attention and investment in the energy transition has clearly
heightened over the past year, with project developers scrambling
to grab unprecedented financial incentives from governments. While
well-publicized supply chain constraints have already started to
clear, clean technology development is exhibiting some growing
pains, ranging from higher capital expenditure estimates, excess
inventories, and high interest rates.
The impact of the economics of decarbonization on international
trade and investment will become more apparent in 2024, as
China seeks to export its clean
technology while international producers look to qualify for
incentives in the US under the Inflation Reduction Act (IRA).
Europe is looking to both protect
its domestic industry from imports from countries that do not
impose stringent environmental standards as well as project
European carbon pricing policy across the globe by unveiling the
specifics of its Carbon Border Adjustment Mechanism (CBAM) and
adding shipping into the EU Emissions Trading Scheme (EU ETS).
Simon Thorne, Climate &
Energy Transformation Lead, S&P Global Commodity Insights,
said: "While the security of oil and gas supply will
remain paramount to many countries, the world is focusing more and
more on securing source materials for clean energy technology,
battery metals, and renewables."
TOP TEN KEY THEMES TO THE 2024 ENERGY OUTLOOK: S&P GLOBAL
COMMODITY INSIGHTS:
- Energy demand searching for a new normal but will be
hard-pressed to find it. Once fairly steady due to relatively
predictable economic and population growth, energy demand has been
subject to unprecedented volatility since the new decade began.
From the staggering level of demand destruction from the COVID
pandemic and the uneven geographic and sectoral recovery from it,
to the repercussions of the Russian invasion of Ukraine, market participants may be wondering
what "normal" demand growth looks like. The delayed recoveries from
COVID in China and in the aviation
sector are now essentially complete and markets have generally
adjusted to altered flows of Russian energy, but there still are
several wildcards for demand in 2024:
- Central banks face the continued challenge of reining in
inflation without damaging economic growth.
- China's economic slowdown
could cause ripples across the region and the globe.
- Questions remain around the recovery of European power and gas
demand, approaching two years since the start of the Ukraine conflict.
- 2024 will be an El Niño year, with a 30% chance that the
weather phenomenon could be historically intense. Against a
background of rising global temperatures, a strong El Niño could
drive extreme weather on both sides of the Pacific (and beyond),
amplifying swings in energy demand and increasing the likelihood of
a more active hurricane season.
- Coal demand likely peaked in 2023; global consumption to
start declining in 2024. Growth in renewables and other clean
technology grabbed the headlines in 2023, but the use of coal
quietly grew in the background, with consumption likely hitting a
new annual record in 2023. The strength in global demand was driven
by China's delayed economic
recovery from COVID combined with underperforming hydro generation.
In 2024, an expected rebound in Chinese hydro generation, a
continued renewables buildout, and slower electricity load growth
should see Chinese coal demand growth decelerate notably from 2023
levels. Coal demand will assuredly grow in India and other developing nations in 2024,
but with weaker Chinese coal growth the continued structural
decline in demand in the US, Europe, and other industrialized nations,
global demand very likely has peaked. However, coal often is the
fuel to backfill for underperforming renewables, when natural gas
is too expensive or unavailable and if overall energy demand is
higher than anticipated. As a result, another year or two of growth
is not completely out of the question.
- One in five cars sold in 2024 will be electric, putting
global gasoline demand on the edge of its peak. Sales of
electric vehicles (EVs) have surged over the past several years,
stimulated by subsidies and tax incentives. However, EVs have
become cost competitive in some markets without subsidies and
automakers are offering a significantly larger and more diverse
portfolio of new EV models and sales growth is starting to hit
another gear. More than a million new EVs are taking to the roads
every month, and EV penetration of new vehicle sales is now over
30% in China, over 20% in
Europe, and over 10% in the US.
S&P Global Commodity Insights projects that EV sales
penetration will reach 20% globally in 2024, fueled by a
significant increase in the US related to the Inflation Reduction
Act and new models on offer. This influx of new EVs – combined with
sustained improvements in the fleet ICE vehicle fuel efficiencies –
will slow gasoline demand growth to less than 300,000 b/d in 2024, and that this may be the
last year of global growth for the fuel.
- Massive growth in North American oil and natural gas supply
growth to continue. Due in large part to strong oil prices, US
oil and gas production surged to new record levels in 2023. The US
now produces around 22 million barrels per day (b/d) of total
liquids, growing by 1.3 million b/d in 2023 alone. Even assuming
weaker oil prices and a slowdown in new drilling going forward,
there is sufficient momentum already in place to see nearly 1
million b/d of growth in 2024 due to increased rig efficiency and
longer laterals. With Canadian liquids expanding by nearly 0.4
million b/d, North American liquids supply growth is expected – on
its own – to meet over 85% of global demand growth in 2024. Despite
low Henry Hub gas prices in 2023, and a pullback in gas-oriented
drilling, lower-48 natural gas production will reach 103.4 billion
cubic feet per day (Bcf/d) in 2024, up by 4.3 Bcf/d due to strong
oil prices stimulating associated gas production. Production growth
is expected to slow but remain positive in 2024, which will
continue the push for higher LNG and pipeline exports.
- OPEC+ and other producers in a difficult position.
Throughout 2023, faced with increasing North American liquids
production as well as growth elsewhere in non-OPEC+ (Brazil, China, Norway, Mexico & Guyana), OPEC+ chose to cut production quotas
in order to defend prices. While these curtailments have kept and
are keeping headline crude oil prices from falling below
$80/b until likely late in 2024,
OPEC's market share has fallen to its lowest point in recent
memory. Already, unity within OPEC+ appears to be fracturing, with
members only able to agree on voluntary cuts at the delayed
November 2023 meeting. OPEC+ crude
production is now set to decline for the second consecutive year in
2024, even as global demand rises. Even if cuts are successful in
keeping oil prices strong, this may ultimately be counterproductive
as it will encourage further growth in non-OPEC+ supply (and
potentially drive additional consumers to shift to EVs). There may
come a point in 2024 where at least some OPEC+ members opt for a
market share strategy over price defense.
- A new wave of consolidation in clean tech; extended wave for
fossil fuels. The unwinding of two years of polysilicon supply
constraints has resulted in lower solar project costs and
potentially wider margins for developers. As a result of this
shift, some companies mis-timed the cycle and are now holding
excess inventory of modules that are being undercut by cheaper
newly-manufactured ones, placing themselves at risk of acquisition.
Western wind turbine manufacturers are struggling with eroded
margins driven by cost inflation and an R&D race to produce
larger turbines, combined with an increasing competition from
Chinese vendors. Consolidation in the clean technology industry is
likely to foster a manufacturing base capable of operating more
comfortably with thinner margins. Fossil fuel producers are coming
off a period of near record margins, and several who have banked
these profits and bought back shares are leveraging their balance
sheets to acquire productive assets at a lower cost than what it
would take to develop them internally (i.e., ExxonMobil and Chevron
acquiring Pioneer Natural Resources and Hess, respectively).
Conditions remain ripe for further consolidation in fossil
fuels.
- A make-or-break year for hydrogen? Perhaps no aspect of
the energy transition has received more attention than hydrogen
over the past year. The US, UK, Netherlands, Germany, Denmark, Portugal, Australia, South
Korea, and India have all
announced supply-side subsidy schemes, with the EU, UK,
Japan and South Korea also putting low-carbon hydrogen
production targets in place. Bullish projections of future hydrogen
demand have led to nearly 100 million mt of announced low-carbon
hydrogen production capacity in various stages of the development
pipeline. However, the industry is encountering sizeable cost
increases, with required capital expenditure estimates going up by
40-50%. While some of the cost inflation may be transitory,
electrolyzer projects tend to be highly complex, bespoke, and are
proving far harder to construct than initially anticipated.
Capacity is increasing but the market is looking for 10-15 large
final investment decisions (FIDs) in 2024 to give confidence that
momentum can be maintained. Also under scrutiny will be the results
of European hydrogen auctions. Bids significantly below ceiling
prices will be evidence of confidence in the market and a tolerance
on the part of developers to accept price and development risk.
Bids at or close to the ceiling will suggest the opposite and could
suggest that hydrogen supply may grow more slowly than
anticipated.
- Surpluses in critical metals are coming, but 2024 may be the
last year of 'low' prices. Battery metals prices surged in
2022 on rapid growth in demand for lithium, cobalt, and nickel.
But demand has since moderated due to the global economic slowdown.
A significant response on the supply side has already cooled
prices, by as much as 50%. Lithium supply has risen more sharply in
2023, boosted by recent project startups notably in Latin America, nickel supply is surging from
Indonesia and China and the flow of cobalt exports from the
Democratic Republic of the Congo
(DRC) has also increased. However, due to continued large increases
in demand for batteries and potential instability in the DRC, these
surpluses will likely fade. Due to the long-lead nature of mining
development, another period of tightness is expected from 2025,
with copper – the key metal for electrification - expected to see
prices moving sharply higher over the medium-to-long term amid the
emergence of significant market deficits for both raw material
(concentrate) and refined products.
- The geopolitics of energy and climate are entering a new
phase. Using energy as leverage in geopolitical affairs has a
long and storied history, most recently in Russia's attempt to weaponize its energy
supply in the invasion of Ukraine.
While Europe has so far managed to
balance supply and demand for oil and without too large of a
disruption, the geopolitical landscape has likely been permanently
altered. Without Europe as an
offtaker, Russia is now extremely
dependent on China, shifting the
balance of power in negotiations regarding the development of the
Power of Siberia 2 pipeline in
Beijing's favor. China is also bolstering its global influence
utilizing its "Belt and Road Initiative" to supply both
domestically-produced renewables and project finance to developing
countries. China is not alone in
using clean energy as leverage in international trade, as potential
trading partners scramble to qualify for use under the US Inflation
Reduction Act. Europe is eyeing
protections to its domestic industry from trade and will unveil the
specifics of its carbon border adjustment mechanism in 2024 as well
as add shipping into the EU Emissions Trading Scheme. Both measures
will effectively project European carbon pricing policy across the
globe, with EU ETS prices set to rise to over €90 per metric ton on
average in 2024.
- Elections are a wildcard. In 2024, 78 elections are
scheduled across the world, over half of which will choose a new
president. Over 2 billion people are expected to go to the polls.
While perhaps not unprecedented, such a concentration of political
risk into one single year is certainly historic. Attention
naturally falls to the US, where any return of a Republican
president to the helm of the worlds' largest economy could threaten
to undo the provisions of the IRA, extract the US from
participation in the Paris Agreement once again and reshape
relations with trading partners. Elections to the European
Parliament in June, as well as polls in individual European
countries through the year will indicate whether or not the
populist swing observed in some states in 2023 will be maintained.
India's next general election will
be held mid-year and votes will also take place in Indonesia, Mexico, and South
Africa. Amid the emergence of more assertive nations in the
Southern Hemisphere, which are seeking to match geopolitical
influence with growing economic heft, the election year of 2024
could further reorder what is already a fluid and disjointed
world.
Dan Klein, Head of
Energy Pathways, S&P Global Commodity Insights, said: "The
still young decade has seen more than its fair share of black swan
events, from the COVID pandemic to wars in Ukraine and now Gaza. Even if such chaotic events fail to
emerge over the next 12 months, volatility will remain high as most
energy markets have not yet been able to adapt to previous swings
in supply and demand fundamentals to find a new normal."
Media Contacts:
Americas: Kathleen Tanzy + 1
917-331-4607, kathleen.tanzy@spglobal.com
Jeff Marn +1
202-560-0776, jeff.marn@spglobal.com
EMEA: Paul Sandell + 44 (0)7816 180039,
paul.sandell@spglobal.com
Asia: Melissa Tan
+ 65-6597-6241, melissa.tan@spglobal.com
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