📉 Consequences of OPEC+ Cuts
Earlier this month, OPEC+ surprised markets with a new round of production cuts to the tune of 1.16 million barrels per day (bpd) beginning in May. Including the preceding cuts, OPEC+ is taking approximately 3.6 million bpd off the table for the remainder of the year.
The International Energy Agency (IEA) and other Western officials say OPEC’s decision will hurt consumers and economies when oil demand picks up this summer.
But it seems the two sides have different perspectives of the same picture.
The IEA says summer travel and China’s reopening economy will boost global oil demand by 2 million bpd to a record of 101.9 million bpd. Despite its production-cutting efforts, OPEC still sees oil demand rising 2.3% to 2.32 million bpd and 2023’s economic growth rising at 2.6%.
To justify production cuts, OPEC’s monthly report cited challenges to economic growth that could soften oil’s outlook.
Specifically, OPEC thinks seasonal demand in the US could falter amidst interest rate hikes, inflation, and an unstable debt environment. Secondly, it says China’s post-COVID awakening has had little effect on a declining crude market. Finally, January’s Organization for Economic Cooperation and Development (OECD) industry oil stocks hit their highest level since the summer of 2021 at 2.83 billion barrels.
However, its report does not acknowledge the restructuring of global oil flows in response to Western sanctions on seaborne deliveries of Russian oil and oil products – a variable the IEA says could play a significant role.
As Europe frees itself from Russia’s stranglehold on its energy supplies, unprecedented volumes of discounted crude are rerouting into Asia. With access to more crude at lower prices, Asian markets are less receptive to Middle Eastern cargoes, and Europe isn’t taking up the slack.
Instead of buying Middle Eastern medium sour crude, European refiners are seeking sweeter crudes, often produced by the US, that require less energy to reduce sulfur content.
Regardless of the reasons, a tight market has numerous consequences.
A record release of 180 million barrels from the US Strategic Petroleum Reserve (SPR) sent the US stockpile to its lowest level since 1984. If prices skyrocket like last year, the White House has one less tool to combat supply constraints.
US oil and gas operators are putting activities on ice while prices fluctuate and supply chains recover, so the lag time between demand and supply is another factor to consider.
In Europe, a mild winter was a lucky break for a continent reeling from 2022’s energy crisis. If the EU doesn’t develop suitable infrastructure to handle natural gas and crude imports before next winter, we could see another tumultuous energy season for the region.
☀️ The G7 Eyes Renewables, Shuns LNG
Accelerating investments into new LNG infrastructure was the expected policy ahead of this week’s G7 environment and energy meetings.
The talks went in another direction, as the group agreed to reduce gas consumption, stop investing in new coal plants, and increase electricity generation from renewable sources.
When countries like Japan proposed using LNG as a transition fuel to secure energy stacks, they were met with mixed reactions. Instead, nuclear was proffered as the best low-emissions pillar to stabilize the transition into renewables.
The decision creates a disconnect between plans and reality for many EU members.
Some European countries are long nuclear. They have existing infrastructure and plans to develop new reactors, so the G7 proposal seems less daunting. France is an excellent example of this category.
Other European countries, i.e., Germany, take the opposite approach. This week, the country closed its remaining nuclear reactors to embark on a renewables-heavy journey.
That looks good on paper, but turbines and solar panels don’t work when the wind doesn’t blow, and the sun doesn’t shine. When renewables fail, Germany powers its energy stability with gas and coal.
Many other EU countries are the same, and the G7’s decision overestimates Europe’s ability to choose efficiency over reliability while navigating the new ‘world order’ in the energy industry.
While the EU has trimmed its reliance on some sources of Russian fuel, Russian LNG imports in the 12 months after the Ukraine conflict climbed. Belgium, Spain, and France all had double-digit percentage increases in Russian LNG imports.
⚛️ Output Begins At Europe’s Largest Nuclear Plant
Finland’s Olkiluoto 3 (OL3) nuclear reactor began regular output on Sunday after 18 years of construction and fine-tuning.
At 1.6 gigawatts (GW), OL3 is Europe’s new largest facility, but time will tell if operations keep up with expectations. Delays and malfunctions have plagued OL3 – it was initially planned to begin normal production in 2009. When it finally initiated generation last March, a new series of malfunctions added months of repairs.
OL3 is Europe’s first reactor in 16 years, coming into operation as Germany closes its final three nuclear facilities. Sweden, France, and the UK already have plans for new reactors, and the G7’s new energy position could lengthen that list.
🔥 Alaska LNG Approval
On Thursday, the US Department of Energy approved Alaska Gasline Development Corp’s (AGDC) LNG exports to countries that lack free trade agreements with the US.
If AGDC reviews the decision and proceeds with the ~$39 billion project on schedule, the US will gain competitive access to Asian LNG markets by 2030.