Some folks never learn. COVID disruptions to both supply and demand have blown rolling bubbles and busts through commodities including lumber, iron ore, precious metals, and foodstuffs. Base metals are still inflated though beginning to struggle. The new bubble is energy.
Each time the formula is the same. Temporary virus distortions boost demand. Temporary supply curtailments amplify it. Wall Street vampire squids move in with their bubble-blowing narratives to create a panic.
There is so little social utility in any of it, you could be forgiven for questioning the usefulness of markets.
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For now, energy remains a genuine problem for everybody. But it is not a structural shortage based ESG or anything else. There has been no shortage of investment over the last decade. On the contrary, investment in gas is in a preposterous golden age. Thermal and coking coal has been more solid than expected. Oil capital has been plentiful if more short-term with the rise of shale. Renewables volumes are off the chart.
It is useful to consult the data. There are many sources that do the job. The BP energy review is one. Oil boom:
There is no structural challenge to energy markets here. What we have got is a cyclcial rally as both demand and supply are hit by COVID. The former has blasted higher during the global inventory rebuild which is beginning to roll off:
This has also driven shipping costs straight up.
Both have transpired just as COVID and other accidents have crimped supply everywhere. Russian geopolitics has added to the pain:
Finally. it has been a very hot northern summer which has contributed to raw material inventory draws. The weather may not be finished with us yet. A tough winter will blow off energy prices. Though it may not:
“We expect a ‘warm sandwich’ this heating season with a potentially very cold center,” said Todd Crawford, director of meteorology at commercial-forecaster Atmospheric G2. That could mean an unusually warm start to the season, then a cold period into January, followed by a mild end of winter and an early spring. “These expectations are broadly appropriate for all major energy-demand centers in eastern U.S., western Europe and northeast Asia.”
This has led to a shortage of stored coal in China (and now India):
And stored gas in Europe:
Which has triggered wild pricing surges. Thermal coal is crazy:
LNG futures are only slightly less insane:
Here is the rub. Such unprecedented prices will reopen supply in everything pronto and when that happens geopolitical leverage, such as that held by Russia right now, will collapse.
Like iron ore and lumber before it, energy has been through this once already during the China supercycle. As such, there are immense quantities of shuttered mines, pipeline capacity, undrilled shale, and LNG trains that can be turned back on in a relative jiffy or are still coming on stream. Right now, China has in process a campaign to reopen 80mt of thermal coal mines which would restore much of what has been lost elsewhere all by itself. Europe is on the verge of opening the Nord Stream 2 pipeline. LNG trains are opening every second day in the US with a deluge coming from Qatar in a few more years.
By the northern Spring, the energy crisis will likely be over as supply responds and inventories are rebuilt. All the more so for the bubble having left a trail of demand destruction in its wake as China falls into recession, the US slows to a crawl as a spooked Fed tapers into a fiscal cliff and the European recovery is shocked.
There are structural challenges raised by decarbonisation for energy but COVID is not one of them.