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Oily Business: Crude Oil, November deal and Uncertainty

Osama Rizvi

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[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] T [/yt_dropcap] he stage is set. The world waits. There are murmurs and whispers. There are speculations and surmises. On 30th November OPEC and Non OPEC countries engage in a rendezvous in an effort to secure a deal. The whole world looks up to it. But a thwart seems to hang over.

From a month or two there has been a deluge of speculations. Sometimes oil markets reveled and at times tensed. There were “Ayes” and “Nays”. Whenever uncertainty trampled the prices we could see any of the oil producers peddling a “There will be a deal” comment into the news hence striving hard for maintaining the optimism. In these nictitating oil market sentiments, uncertainty lurks everywhere.

There is Russian defection. The Iran and Iranian obstinacy. The Saudi fickleness. All are adding up to the worries. As of today (29th Nov) KSA has proposed a production cut for Iraq and a freeze for Iran. The former has refused and want to freeze and the latter, albeit agreeing to freeze, exceed the ceiling proposed by KSA. They have proposed that Iran freezes at 3.79 million barrels but Tehran says it will not concur to anything less than 3.97 million barrels per day.

The oil prices took a dive Friday (25th Nov) when there was an announcement that fell like a sharp dagger breaking the beautiful picture of a deal into little pieces. I think there has been a sudden realization, a bedazzling epiphany that has put a kibosh (temporarily) on the much awaited November Oil deal.

There has been a ham-fisted attempt at creating a buffoonish illusion. The illusion to make the world buy a production-freeze as a production cut! And the executioner of this oily legerdemain is none other than Russia. It is important here to note that it was Russia’s unconditioned support to a production cut that has been able to drive up the prices from past two months when the party met in Istanbul on the sidelines of International Energy Forum.

In my recent series of articles on this November 30th deal I have always clung to the point that these meetings amount to nothing but a lull to appease the restless markets. The comments serve as a pain-killer for the debt-ridden producers, attrition-smitten and bankrupt oil companies. The recent Trump Triumph is another stock amidst the confounding milieu. His pro-drilling nature and environmental nescience makes many to ponder what effect it will have on the future energy markets. But if we critically analyze it he and his stances are not to affect, at least oil, profoundly. Only the price wields the prowess to change the situation and this bring us to the fundamentals.

The world is still awash with oil. Last time the inventory buildup at Cushing, Oklahoma was termed as “the most bearish report on oil”. However, EIA has provided a little breathing space as it reported a 1.3 million barrel decline in inventory levels at Cushing, Oklahoma for the week November 18. Also, the number of increasing rigs is a continuous worry. This week Baker and Hughes reported an additament of 3 rigs making the total 474 and a week before oil rigs also followed on the heels of Cushing inventory rising by 19, the greatest since July 2015.

The upward tick in prices, whenever it ensues, starts a vicious cycle. As prices aggravate, the nodding donkeys are herded towards the oil fields, resultantly more production, and more supply which, ergo, once again pushes down the supply. There are at-least 5000 DUC wells right now in U.S. if prices rise imagine the deluge. This has been the case from the second half of 2015 and hitherto. And it won’t change either.

Then what is the panacea? It is demand. Unless or until the maw of demand gobbles up the excess supply there is no permanent solution to these predicament. IEA’s Oil market report for November doesn’t helps in this regard. Also the Middle Eastern producers Iran and Iraq are a cause of continuous exasperation as they have not agreed to be a part of any production cut or freeze. Iran says it can freeze their production at 4.2mbpd but the proposition given to them is of 3.2-3.6mbpd. Iraq says it needs to pump in order to have the money to fight IS. Libya and Nigeria has also started to ramp up the production as the attacks in Libya settle down and Niger Delta Avengers have dwindled their strikes. Chinese slow demand is always, once again, a great issue.

With all this being said I opine that KSA will still attend the meeting. But as the current overtures tacitly insinuates. The likelihoods of any deal are very low. What can happen is that there can be a word-play and commitments with hand-shakings and smiles. The chances of even this are also very low. As the days will pass, uncovering the stark reality which was and is always there, the prices will come more down. When they started it was a production cut, then there were few defectors, now it has transmogrified into a freeze and the worse, Russia’s non-participation. These are, certainly, omens that bade ill for the future. These are the signs that show a chronic oil price dip. These signs…are not good.

Let us not be naïve. Let us not be blind. This procrastination. This deliberate defection. This infusion of confusion. To a man cherishing a decent amount of common sense. It clearly indicates: No deal. It seems as it was in a fit of optimism and friendship that OPEC and Non-OPEC producers played with the feelings of the market. No one wants to lose their share. In talks, in news it all sounds and look good. But in reality, in paper, in practice no one wants to do it. This is a bitter truth.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.

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Energy

Four Things You Should Know About Battery Storage

MD Staff

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The global energy landscape is undergoing a major transformation. This year’s Innovate4Climate (I4C) will have a priority focus on battery storage, helping to identify ways to overcome the technology, policy and financing barriers to deploy batteries widely and close the global energy storage gap.

Here are four things about battery storage that are worth knowing.

First, energy storage is key to realizing the potential of clean energy

Renewable sources of energy, mainly solar and wind, are getting cheaper and easier to deploy in developing countries, helping expand energy access, aiding global efforts to reach the Sustainable Development Goal on Energy (SDG7) and to mitigate climate change. But solar and wind energy are variable by nature, making it necessary to have an at-scale, tailored solution to store the electricity they produce and use it when it is needed most.

Batteries are a key part of the solution. However, the unique requirements of developing countries’ grids are not yet fully considered in the current market for battery storage – even though these countries may have the largest potential for battery deployment.

Today’s market for batteries is driven mainly by the electric vehicles industry and most mainstream technologies cannot provide long duration storage nor withstand harsh climatic conditions and have limited operation and maintenance capacity. Many developing countries also have limited access to other flexibility options such as natural gas generation or increased transmission capacity.

Second, boosting battery storage is a major opportunity

Global demand for battery storage is expected to reach 2,800 gigawatt hours (GWh) by 2040 – the equivalent of storing a little more than half of all the renewable energy generated [today] around the world in a day. Power systems around the world will need many exponentially more storage capacity by 2050 to integrate even more solar and wind energy into the electricity grid.

For battery storage to become an at-scale enabler for the storage and deployment of clean energy, it will be imperative to accelerate the innovation in and deployment of new technologies and their applications. It will also be important to foster the right regulatory and policy environments and procurement practices to drive down the cost of batteries at scale and to ensure financial arrangements that will create confidence in cost recovery for developers. It will also be essential to find ways to ensure sustainability in the battery value chain, safe working conditions and environmentally responsible recycling.

With the right enabling environment and the innovative use of batteries, it will be possible to help developing countries build the flexible energy systems of the future and deliver electricity to the 1 billion people who live without it even today.

Third, battery storage can be transformational for the clean energy landscape in developing countries

Today, battery technology is not widely deployed in large-scale energy projects in developing countries. The gap is particularly acute in Sub-Saharan Africa, where nearly 600 million people still live without access to reliable and affordable electricity, despite the region’s significant wind and solar power potential and burgeoning energy demand. Catalyzing new markets will be key to drive down costs for batteries and make it a viable energy storage solution in Africa.

Already, there is tremendous demand in the region today for energy solutions that do not just boost the uptake of clean energy, but also help stabilize and strengthen existing electricity grids and aid the global push to adopt more clean energy and fight against climate change.

Fourth, the World Bank is stepping up its catalytic role in boosting battery storage solutions

There is a clear need to catalyze a new market for batteries and other storage solutions that are suitable for electricity grids for a variety of applications and deployable on a large scale. The World Bank is already taking steps to address this challenge. In 2018, the World Bank Group announced a $1 billion global battery storage program, aiming to raise $4 billion more in private and public funds to create markets and help drive down prices for batteries, so it can be deployed as an affordable and at-scale solution in middle-income and developing countries.

By 2025, the World Bank expects to finance 17.5 GWh of battery storage – more than triple the 4-5 GWh currently installed in developing countries. With the right solutions, it can be possible to build large-scale renewable energy projects with significant energy storage components, deploy batteries to stabilize power grids in countries with weak infrastructure, and increase off-grid access to communities that are ready for clean energy with storage.

The World Bank has already financed over 15% of grid-related battery storage in various stages of deployment in developing countries to date.

In Haiti, a combined solar and battery storage project will ultimately provide electricity to 800,000 people and 10,000 schools, clinics and other institutions. An emergency solar and battery storage power plant is being built in the Gambia, as are mini-grids in several island states to boost their resilience.

In India, a joint WB-IFC team is developing one of the largest hybrid solar, wind and storage power plants in the world, while in South Africa, the World Bank is helping develop 1.44 gigawatt-hours of battery storage capacity, which is expected to be the largest project of its kind in Sub-Saharan Africa.

World Bank

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Energy

Driving a Smarter Future

MD Staff

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Today the average car runs on fossil fuels, but growing pressure for climate action, falling battery costs, and concerns about air pollution in cities, has given life to the once “over-priced” and neglected electric vehicle.

With many new electric vehicles (EV) now out-performing their fossil-powered counterparts’ capabilities on the road, energy planners are looking to bring innovation to the garage — 95% of a car’s time is spent parked. The result is that with careful planning and the right infrastructure in place, parked and plugged-in EVs could be the battery banks of the future, stabilising electric grids powered by wind and solar energy.

Today the average car runs on fossil fuels, but growing pressure for climate action, falling battery costs, and concerns about air pollution in cities, has given life to the once “over-priced” and neglected electric vehicle.

With many new electric vehicles (EV) now out-performing their fossil-powered counterparts’ capabilities on the road, energy planners are looking to bring innovation to the garage — 95% of a car’s time is spent parked. The result is that with careful planning and the right infrastructure in place, parked and plugged-in EVs could be the battery banks of the future, stabilising electric grids powered by wind and solar energy.

Advanced forms of smart charging

An advanced smart charging approach, called Vehicle-to-Grid (V2G), allows EVs not to just withdraw electricity from the grid, but to also inject electricity back to the grid. V2G technology may create a business case for car owners, via aggregators (PDF), to provide ancillary services to the grid. However, to be attractive for car owners, smart charging must satisfy the mobility needs, meaning cars should be charged when needed, at the lowest cost, and owners should possibly be remunerated for providing services to the grid. Policy instruments, such as rebates for the installation of smart charging points as well as time-of-use tariffs (PDF), may incentivise a wide deployment of smart charging.

“We’ve seen this tested in the UK, Netherlands and Denmark,” Boshell says. “For example, since 2016, Nissan, Enel and Nuvve have partnered and worked on an energy management solution that allows vehicle owners and energy users to operate as individual energy hubs. Their two pilot projects in Denmark and the UK have allowed owners of Nissan EVs to earn money by sending power to the grid through Enel’s bidirectional chargers.”

Perfect solution?

While EVs have a lot to offer towards accelerating variable renewable energy deployment, their uptake also brings technical challenges that need to be overcome.

IRENA analysis suggests uncontrolled and simultaneous charging of EVs could significantly increase congestion in power systems and peak load. Resulting in limitations to increase the share of solar PV and wind in power systems, and the need for additional investment costs in electrical infrastructure in form of replacing and additional cables, transformers, switchgears, etc., respectively.

An increase in autonomous and ‘mobility-as-a-service’ driving — i.e. innovations for car-sharing or those that would allow your car to taxi strangers when you are not using it — could disrupt the potential availability of grid-stabilising plugged-in EVs, as batteries will be connected and available to the grid less often.

Impact of charging according to type

It has also become clear that fast and ultra-fast charging are a priority for the mobility sector, however, slow charging is actually better suited for smart charging, as batteries are connected and available to the grid longer. For slow charging, locating charging infrastructure at home and at the workplace is critical, an aspect to be considered during infrastructure planning. Fast and ultra-fast charging may increase the peak demand stress on local grids. Solutions such as battery swapping, charging stations with buffer storage, and night EV fleet charging, might become necessary, in combination with fast and ultra-fast charging, to avoid high infrastructure investments.

To learn more about smart charging, read IRENA’s Innovation Outlook: smart charging for electric vehicles. The report explores the degree of complementarity potential between variable renewable energy sources and EVs, and considers how this potential could be tapped through smart charging between now and mid-century, and the possible impact of the expected mobility disruptions in the coming two to three decades.

IRENA

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Energy

What may cause Oil prices to fall?

Osama Rizvi

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Oil prices have rallied a whopping 30 percent this year. Among other factors, OPEC’s commitment to reduce output, geopolitical flash-points like the brewing war in Libya, slowdown in shale production and optimism in U.S. and China trade war have all added to the increase. The recent rally being sparked by cancellation of waivers granted to countries importing oil form Iran has taken prices to new highs.

However, one might question the sustainability of this rally by pointing out few bearish factors that might cause a correction, or possibly, a fall in oil prices. The recent sharp slide shows the presence of tail-risks!

Libya produces just over 1 percent of world oil output at 1.1 million barrels, which is indeed not of such a magnitude as to dramatically affect global oil supplies. What is important is the market reaction to every geopolitical event that occurs in the Middle East given the intricate alliances and therefore the increasing chances of other countries jumping in with a national event climaxing into a regional affair.

Matters in Libya got serious as an airstrike was carried out on the only functioning airport in the country a few days ago. Khalifa Haftar who heads Libyan National Army has assumed responsibility for the strike. However, UN and G7 have urged to restore peace in Tripoli. Russia has categorically said to use “all available means” while U.S.’ Pompeo called for “an immediate halt” of atrocities in Libya.

The fighting has been far from locations that hold oil but the overall sentiment is that of fear which is understandable as this happens in parallel to a steep decline in Venezuelan production, touching multi-year low of 740,000 bpd.  However, as international forces play their part we might expect a de-escalation in the Libyan war — as it has happened before.

Besides the chances of an alleviation of hostilities in Libya, concerns pertaining to global economic growth, and thereof demand for oil, have still not disappeared. The U.S. treasury yield, one of the best measures to predict a future slowdown (recession),  inverted last month; first time since 2007. If this does not raise doubts over the global economic health then the very recent announcement by International Monetary Fund (IMF) who has slashed its outlook for world economic growth to its lowest since the last financial crisis. According to the Fund the global economy will grow 3.3 percent this year down from 3.5 percent that predicted three months ago.

image: Bloomberg

Then there is Trump, whose declaration of Iran’s IRGC as a terrorist organization might increase the likelihoods of yet another spate of heated rhetoric between the arch-rivals. But if he is genuinely irked by higher oil prices as his tweets at times show and if he thinks that higher gasoline prices can hurt his political capital then this will certainly have a bearish effect on the markets as observers take a sigh regarding the mounting, yet unsubstantiated,  concern over supply.

One of the factors that contributed most to the recent rally was OPEC’s unwavering commitment to its production cuts. The organization’s output fell to its lowest in a year at 30.23 million barrels per day in February 2019, its lowest in four years. But the question remains for how long can these cuts go on? Last month it was reported the Kingdom of Saudi Arabia had admitted that they need oil at $70 for a balanced budget while estimates from IMF claims that the level for a budget break-even are even higher: $80-$85. We should not forget Trump and his tweets in this regard as well. Whenever prices have inched up from a certain threshold POTUS’ tweet forced the market to correct themselves (save the last time). One of the key Russian officials who made the deal with OPEC possible recently signaled that Russia may urge others to increase production as they meet in the last week of June this year. While this is not a confirmation that others will agree but it certainly shows that one of the three largest oil producers in the world does feel that markets are now almost balanced and the cuts are not needed further.

Now with the recent cancellation of waivers we should expect U.S. to press KSA to increase production to offset the lost barrels and stabilize the prices.

Finally stoking fears of an impending supply crunch (a bullish factor) is the supposed slowdown in U.S. Shale production. But the facts might be a tad different. Few weeks ago U.S. added 15 oil rigs in one day, a very strong number indeed-this comes after a decline of streak of six consecutive weeks. According to different estimates the shale producers are fine with prices anywhere between $48 to $54 and the recent rise in prices has certainly helped. Well Fargo Investment Institute Laforge said that higher prices will result in “extra U.S. oil production in coming months”. Albeit, U.S.’ average daily production has decreased a bit but it doesn’t mean that the shale producers cannot bring back production online again. Prices are very conducive for it.

So if you think that prices will continue to head higher, think again. Following graph shows that oil had entered the overbought territory few days back–hence the recent slide.

Therefore, If the war in Libya settles down (and there is a strong possibility that it will); rumors of a production increase making its way into investors’ and traders’ mind (as it already have) and global economy continue to struggle in order to gain a strong footing — the chances are oil will fall again. The current rally might last for some-time but, like always, beware not to buy too high.

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