World Commodities Trading
Oil prices and consumption
A huge number of pundits and organizations have trumpeted the idea that the pandemic will accelerate the peak in world oil demand, due to a combination of slower economic growth and changing consumer behavior. Most amusing are those who think the instability in oil prices will discourage use of oil, as if a drop in price would scare away consumers. Without a doubt economic growth and income are the primary drivers of oil consumption, but price is the most important secondary element. It’s not that a price crash will encourage consumers to leave their cars running in the driveway, but on the margin, it will make them less inclined to save gasoline, especially if it costs money. Although the current pandemic is a serious crisis, it will almost certainly end and life will probably begin to return to a semblance of normal within a year or two. At that point, oil demand should return to pre-pandemic levels, at which point the impact of lower oil prices should become more obvious. Lower oil prices normally translate into higher global economic growth, as consumers around the world have more spending money (although oil exporters take a negative hit). Perusing some of the work on the relationship between oil prices and economic growth suggests that the global economy could be boosted by close to 1 percent given the drop in oil prices of 1/3 in 2020, which would add 250-500 tb/d to oil demand. Obviously, this is negligible compared to the pandemic effect, but the longer term impact will be positive. Consumer behavior will be more important. As much as people talk about working from home or the sharing economy, it is a very solid economic law that, all else being equal (yes, I hate that phrase too), lower prices will mean higher demand. There are very few cases, however, when oil prices dropped sharply and remained lower, notably 1986 and 2014.
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COVID-19 and global coal
Coal consumption in key markets slipped during the first half of 2020 as a late recovery in China’s coal burn failed to offset weakness in the earlier periods of the year. Combined coal-fired generation in China, France, Germany, India, Japan, Spain, Taiwan, Turkey, the UK, South Korea and Vietnam fell by nearly 30GW, or 4 percent, on the year to 690GW, according to Argus estimates based on data from power generators and grid operators. This implies a 40mn t drop in consumption of NAR 6,000 kcal/kg-equivalent coal to 1.13bn t, assuming a unit efficiency of 38 percent. This was in line with a sharp drop in overall power output, which fell by 56GW, or 4 percent, to 1.3TW in January-June. India and China, the world’s two biggest coal consumers, registered the sharpest drops — 11.7GW and 20.6GW, respectively. Indian coal burn was stable on the year during the first quarter, but fell sharply in April-June as COVID-19 measures weighed on industrial activity. Indian coal-fired output fell to 102GW in January-June, down from 119GW, Central Electricity Authority data show. Indian power demand and coal-fired output have started to recover in recent months and the latter is nearly back at seasonal norms in July, with the year-on-year deficit narrowing to 3GW in July. But India’s imports are still likely to fall this year — even if coal demand fully recovers or grows — as inventories remain at historic highs. The decline in China’s coal consumption was smaller, thanks to a swift recovery in power demand in the second quarter. China’s overall power generation was 3 percent down on the year in January-June, at 755GW, while estimated coal-fired output was only 0.5 percent, or 2.5GW, lower on the year, at 505GW. The recovery in thermal output in southern coastal provinces — with the biggest seaborne coal intake — was strong enough to lift the national total in January-June. A jump in Guangdong province’s electricity demand in May pushed up the call on thermal output, and overall coal-fired generation in the coastal regions of Guangdong, Guangxi, Zhejiang, Fujian and Hainan rose by 1.8GW to 90.4GW in January-June. The decline in coal-fired output was also less severe elsewhere in Asia-Pacific.
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Demand of natural gas
The world’s consumption of natural gas is set to decline by four percent this year, but global demand will return to growth after the pandemic, thanks to low natural gas prices and stricter environmental policies. The Global Gas Report 2020 – published by the International Gas Union (IGU), research company BloombergNEF (BNEF), and Italian gas infrastructure firm, Snam, said the trend of increased natural gas demand due to environmental concerns, which was already underway before the pandemic, will continue after COVID-19 is under control. Earlier, an analysis of S&P Global Platts Analytics data showed that exports of LNG from West Africa’s four producers have shown some resilience, despite economic turmoil triggered by the coronavirus pandemic. Total LNG exports from the four exporting countries in the region – Nigeria, Angola, Equatorial Guinea and Cameroon, so far this year are broadly in line with volumes supplied in the same time frame last year, the data show. That is despite sharp falls in LNG utilization rates in other parts of the world, particularly in the US, while spot-exposed Egypt has halted LNG exports altogether. Nigeria is exposed to the spot market with around 50percent of its LNG exports last year sold on a spot or short-term basis, according to industry group GIIGNL. But Nigeria’s LNG exports in 2020, have stayed strong despite weaker demand and low prices, with some 11 billion cubic meters (Bcm) exported in the first five months of the year. Although some loaded cargoes had taken longer to reach their destinations, while others have been idling at sea in recent weeks, but exports continued out of the country’s only LNG plant, the 22 million mt/year Nigeria LNG facility.