Suddenly, talking about a global energy crisis doesn't sound crazy anymore, exclaims Phil Flynn of the PRICE Futures Group.
Years of underinvestment in the fossil fuel sector, driven in large part by governments that discouraged the production of fossil fuels in favor of a quick transition to alternatives, has now created a situation that has put the global economy at risk. While the green energy lobby kept telling us that their fuels are reliable, the truth is they can’t compete with the reliability of fossil fuels. The transition must be based on reality and not pie in the sky platitudes.
There was more evidence of that overnight as China’s gross domestic product grew 4.9% in the third quarter from a year ago, the National Bureau of Statistics said on Monday. That missed expectations for a 5.2% expansion according to analysts polled by Reuters. Industrial production rose by 3.1% in September, below the 4.5% expected by Reuters as well.
Oil prices are being driven higher because of concerns about fuel switching shortages to coal in China, along with sharply higher prices for natural gas making dirty old oil looking more attractive at keeping the lights on. Reuters reported that China's power woes look set to intensify as coal prices rose to a record on Monday following data showing the supply of the fuel fell in September adding to concerns that domestic output may be unable to meet surging electric generation demand.
China, the world's biggest energy consumer, has enacted measures to increase the output of coal, which fuels nearly 60% of its power plants. Government data on Monday showed that those steps will take time, even as power demand surges to meet post-Covid-19 industrial needs. Coal output in China was 334.1 million tonnes last month, down from 335.24 million tonnes in August and 0.9% lower from a year earlier.
The energy shortage is also impacting the European economy. Factories are paying sharply higher prices for natural gas and that is impacting the prices on other commodities across the board. As the energy crisis creeps into commodity prices and corporate profits more and more, it's becoming apparent that if this winter is a particularly cold one, we’ll see significant challenges keeping people warm with the lights on and keep factories going at the same time.
The sharply rising price of energies and the shortages of energy are also going to make the supply chain issues much worse. If you can't produce enough goods without energy, then you're going to have crunches disrupt the economy. This is going to be an issue for the Federal Reserve that is going to be starting their tapering process, and with inflation pressures rising, they're feeling the heat. If energy prices are too high and the Fed becomes more hawkish, it's very possible that could squeeze a lot of small businesses that are already feeling the heat from rising energy prices and supply chain shortages.
Can the weather forecasters ever make up their minds? Flip-flopping forecasts on warm to cold weather and back to warm has natural gas traders scratching their heads. Overnight we sold off on warmer forecast but is it possible that now that they're turning back colder, will this be enough to drive you nuts? EBW Analytics says that November natural gas slipped to $5.410/MMBtu on Friday to post a second straight weekly decline despite: (i) a weather forecast shift that added 20 Bcf of demand for natural gas, (ii) the first bullish EIA storage surprise since Hurricane Ida, and (iii) modest gains in Dutch TTF gas futures. A mild weather forecast shift over the weekend that saw the 1-15 day outlook lose six gHDDs, as well as an unexpected downturn in LNG feedgas demand at Sabine Pass over the weekend, will both likely add weight to bearish technicals—pulling the November natural gas contract lower this week. Although near-term softness is likely, November weather could soon exert significant fundamental impacts. A cold shot for the second week of November appears to be in the works and could rapidly rejuvenate both storage adequacy fears and NYMEX gas risk premiums.
Learn more about Phil Flynn by visiting Price Futures Group.
