Thursday, 2 March 2023

POWER UP: Oil might climb on growing demand, rooftop solar outpacing coal

by Berkeley Lovelace

Oil prices might be heading for their fourth monthly loss in a row on concerns that the US Federal Reserve might keep interest rates high to keep inflation in check, which unfortunately also serves to curb consumer demand and drag on economic activity.

This has more than offset the expectations that demand will climb as China continues to reopen its economy or further constraints to supply as Russia slashes output.

The benchmark Brent crude fell 1.4% on Monday to US$81.75 per barrel.

However, the drop in oil prices has not stopped Vitol chief executive officer Russell Hardy from forecasting that demand could hit record highs later this year and send prices back up past the US$100/bbl mark.

Oil prices last touched the US$90 to US$100 range in November last year.

Hardy told Bloomberg that while demand for most oil products is already surpassing pre-pandemic levels, demand for petrol remains flat, while jet fuel is still playing catch up as air travel continues to lag.

Nor is he the only commentator who believes this.

Saxo Bank head of commodity strategy Ole Hansen said that only a deepening economic slowdown or peace deal in Ukraine would impact its view of higher prices later this year.

There are good reasons that this view is likely to come to pass, among them OPEC and its allies’ reluctance – or some suspect inability – to crank up production and Russia’s increasing inability to sustain its current output levels.

That said, there are signs that the promised soft landing for the global economy, which involves the end of inflationary pressures that will in turn allow policymakers to stop raising interest rates, is becoming less likely.

Rather a significant and extended cyclical slowdown or even a full-blown recession in the course of 2023 is becoming more plausible with Reuters noting that the manufacturing slowdown is consistent with the onset of previous recessions in 2001, 2008 and 2020 as well as mid-cycle slowdowns in 2013 and 2015.

Global trade volumes were also down 3% in December 2022, which is again associated with the onset of a recession as opposed to a mid-cycle slowdown.

While it is anyone’s guess which way the global market – and hence oil prices – will go, steering the global economy to a soft landing will need a deft hand to thread the needle. Plausible but with a significant chance of failure.

Is rooftop solar poised to overtake coal?

On an entirely different note, a new report from energy consultants Sunwiz has indicated that with more than 20,000 megawatts of small-scale solar capacity installed, rooftop solar is poised to eclipse the generating capacity of coal-fired power in April.

This will be aided by the planned closure of AGL’s 2,000MW Liddell coal plant in New South Wales and new installations running at a rate of about 300,000 a year.

While both small and large scale solar already make up the largest source of electricity in Australia, for rooftop solar alone to put coal to shame speaks volumes about the progress that renewables has made as Australia progresses towards net zero emissions.

It is worth noting that while generation capacity isn’t quite the same thing as actual generation volumes – for which coal still makes up the bulk of the national electricity market – the growth of rooftop solar is a continuation of the gradual chipping away of coal’s dominance.

Before emissions are even taken into account, coal-fired power has proven that it can’t compete with solar in the middle of the day, which has contributed to the growing momentum of coal plants closing earlier than previously announced.

There’s little doubt that renewables (and energy storage) still have a ways to go before displacing fossil fuels entirely but the wheels certainly seem to be turning with coal looking to be the first to shuffle off into the great unknown.

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