Opec headquarters
As several baffled Opec insiders said on Monday, the timing of any production increase now would be very odd © Getty Images

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Welcome to another Energy Source.

Expectations for COP27 were low, given western countries’ race to secure more fossil fuel supplies after Russia’s full-scale invasion of Ukraine. But the outcome — with its vague agreement that rich countries disproportionately contributing to climate change will compensate poorer ones suffering most from it — was still a let-down. And if you are a producer or consumer of energy — dirty or clean — the summit was a non-event. Consumption of all forms of energy, from coal to solar, continues to rise. So do emissions.

With impeccable timing, meanwhile, China stepped up while the private jets were still on the Sharm el-Sheikh runway to announce a colossal new liquefied natural gas supply deal with Qatar — one that is likely to raise eyebrows in Europe, where utilities have been more reluctant to commit to such long-term purchase agreements.

Our main note today is on oil markets, which were volatile yesterday. And speaking of Qatar, Amanda’s Data Drill looks at the carbon cost of the World Cup.

England is off to a great start, by the way, although memo to Gareth Southgate: Manchester’s finest Marcus Rashford should be in the first 11.

Thanks for reading. — Derek

Is Opec about to increase oil supply?

Oil prices were wild again yesterday, first plunging after a Wall Street Journal story claimed Opec would raise production — just a month after pledging to slash it — and then recovering after Saudi Arabia issued a robust denial, hinting instead that it could even cut more supply if necessary. The UAE said similar. A statement from Russia saying it too could cut production again if the proposed price cap went ahead also helped prices settle roughly flat, despite plummeting earlier in the day.

So what’s going on?

It’s not totally out of the question that Opec would increase output now, given that some countries, such as Iraq and the UAE, have chafed at cuts in the past. As the news surfaced, some commentators speculated privately that Saudi Arabia was now willing to reward Joe Biden after his administration granted the kingdom’s crown prince (and prime minister), Mohammed bin Salman, immunity for his role in the murder of journalist Jamal Khashoggi.

Don’t forget, either, that as a virus began shutting down the global economy — and oil demand — in the spring of 2020, Saudi Arabia opened the taps. The kingdom has pulled off surprises before.

But, as several baffled Opec insiders said yesterday, the timing of any production increase now would be very odd. After all, last month’s decision to cut supply, Opec insisted, reflected mounting evidence of a weakening economy and slowing global oil demand.

“We need to pre-empt a crash in the oil market because of the slowdown,” Suhail Al Mazrouei, the UAE’s energy minister, told us at the time.

Saudi energy minister Prince Abdulaziz bin Salman said Opec needed to be “proactive” and avoid the mistakes of central banks that had acted “belatedly” in raising interest rates.

Line chart of $/barrel showing Oil has slid from its post-Ukraine invasion highs

That was all six weeks ago — but the data look even worse now. Before last month’s Opec meeting, the group had forecast a 2.3mn barrels-a-day increase in oil demand in 2023, and the International Energy Agency’s estimate was 2.1mn. Opec has since trimmed that back by 100,000 b/d and the IEA has lopped 500,000 b/d from its forecast for 2023, to 1.6mn.

China, the global engine of oil demand growth in recent years, is the main problem. Thanks to its “unbending” zero-Covid policy and stuttering economy, the IEA believes Chinese oil demand will end 2022 down more than 3 per cent.

“Oil’s global demand outlook continues to face a myriad of headwinds in the shape of rising recession odds, China’s persistently weak economy, Europe’s energy crisis, soaring product crack values and a strong US dollar,” the IEA said in its latest Oil Market Report, published earlier this month.

The market itself is hardly signalling the need for more oil. Even after rising yesterday, Brent is down 11 per cent since its October high. Meanwhile, the front of the forward curve for West Texas Intermediate is now in contango (meaning spot prices are cheaper than the price for oil to be delivered months later) and Brent is flirting with the same. Contango is a reliable signal of bearish sentiment.

Line chart of 12-month spread ($/barrel) showing The one year spread is sliding towards contango ...
Line chart of 1-month spread ($/barrel) showing ... and the one month WTI spread is already there

The bearish sentiment might not last, given that the market is less than three weeks away from the enforcement of tighter sanctions on oil shipments from Russia, the world’s largest oil exporter. On Monday, Moscow’s deputy prime minister Alexander Novak reminded the market of this looming cliff-edge, reiterating that his country could cut oil exports unilaterally if customers co-operated with western nations’ plan to cap the price at which Russia sells its crude.

In that case, perhaps Saudi Arabia would consider upping supply again, say people familiar with its thinking. But this is far from front of mind right now, said analysts.

“Saudi Arabia remains extremely concerned about the state of oil demand, particularly in China, which led them to cut production last month to begin with,” said Amrita Sen, head of research at consultancy Energy Aspects. “Reversing that at a time when Chinese lockdowns are worsening and some crude grades are in contango would defy logic.”

If anything, Abdulaziz’s statement yesterday saying the kingdom “categorically denies” the report that Opec was about to raise output, hinted at even deeper cuts to keep an oversupply at bay. “The current cut of 2mn barrels per day by Opec+ continues until the end of 2023 and if there is a need to take further measures by reducing production to balance supply and demand, we always remain ready to intervene,” Abdulaziz said.

The ministry’s strong statement “and suggestion that further cuts are not entirely off the table should give market participants pause about predicting a policy reversal at the next meeting”, wrote Helima Croft, head of global commodity strategy at RBC Capital Markets, in a note.

“We see a significant chance of a ‘stay the course’ decision until there is clear evidence of a real Russia supply disruption but acknowledge that an Opec baseline adjustment that could lead to a modest increase could still be considered,” she added. (Derek Brower)

Data Drill

The 2022 World Cup kicked off this weekend in Qatar, and it comes with a hefty carbon footprint. Fifa projects that the tournament’s total emissions will reach 3.6mn tonnes of CO₂ — equal to the annual emissions of some small nations — casting doubt on the tournament’s claims of being carbon neutral

Emissions may even surpass Fifa’s estimate. A Carbon Market Watch report projects stadium construction emissions were eight times higher than Fifa’s projections and accused the organisation’s mitigation measures, which include carbon offsets and a tree nursery, of lacking integrity.

Fifa said it used the Greenhouse Gas Protocol, the most widely used accounting standards to quantify emissions, and had South Pole, a carbon consulting firm, create Fifa’s carbon footprint report.

Football’s governing body also said they implemented a comprehensive set of initiatives to reduce emissions including energy-efficient stadiums, low-emission transportation, and sustainable waste-management practices.

Large sporting events like the World Cup and Olympics have come under growing scrutiny for their expensive and carbon-intensive facilities built to be used for only a few weeks at most.

Since Qatar won its bid in 2010 to host this year’s tournament, the oil-rich nation has spent $200bn on World Cup infrastructure, including the construction of seven stadiums, an effort fraught with concerns over human rights abuses. (Amanda Chu)

Bar chart of Scope 3 emissions by source showing The bulk of emissions at the 2022 World Cup will come from air travel

Power Points

  • Cheaper energy costs and climate subsidies in the US are sparking an investment exodus as European industry shifts production across the Atlantic.

  • BP says Biden’s new climate law will put green plans in the US “on steroids”.

  • Future emissions from active coal plants will exceed those from all coal plants to date.

  • Big companies are claiming “carbon neutrality” by buying carbon offsets that experts say are useless. (Bloomberg)

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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