Things are Hotting Up, Just Not the Weather — ChAI
Commodities markets continue to make the headlines, as the ‘commodities supercycle’ narrative gained further traction in recent weeks due to fundamentals, namely the weather.
A lot of the weather the planet has experienced recently can be attributed to a weakening Polar Vortex — winds high up in the stratosphere, up to 30 miles (50 km) above the earth. A weakening polar vortex usually results in a weakening jet stream, a large and powerful stream of air (wind) closer to the surface of the planet, at around 8–11km (5–7mi) altitude which flows west-to-east around the globe.
As this jet stream drops in activity, it allows colder air to push down from the arctic, and this is what we have been witnessing in the last few months. It first came to prominence in December and January, as very cold air pushed downwards across Northern Asia, particularly impacting Northern China and Japan, causing a spike in Asian LNG prices.
Closer to home we have subsequently seen colder than normal European temperatures, with freezing conditions across much of the UK and European mainland, and more recently down across Southern Europe and even the Middle East. We are seeing unprecedented and widespread snowfall taking place in Lebanon, Israel, Greece and Turkey just this week alone.
However, perhaps the biggest effect on commodities prices is currently being played out in the US across the southern and Gulf states.
The image below shows the average position of the jet stream during the La Nina seasons, and the corresponding weather development over North America. But as this jet stream has weakened, freezing arctic air has made its way further south in recent weeks, with significant impact on the lower region US southern and gulf states, who rarely see these types of wintery conditions.
It has been estimated that over 40% of gulf oil production has been impacted by frozen well heads and frozen pipelines — the region could lose up to 20mln barrels of Oil production by March. Power outages have also led to the shutdown of several refineries in Texas, which removed at least 3 million bpd, and possibly more, in refining capacity.
However severe the impact, most analysts believe it will be short lived as temperatures return to normal in the coming weeks.
Of longer term significance could be the reputational impact and federal response regarding the performance of various energy sources and providers during these events.
Texas in particular has been the focus, where the Electric Reliability Council of Texas (ERCOT) which operates the power grid that covers most of the state, commented that it was “seconds and minutes” away from a catastrophic failure that could have left Texans in the dark for months, due to uncontrolled blackouts across the state.
Rolling blackouts were indeed introduced last week, which lasted for a number of days and affected millions of households, because operators saw that a massive amount of energy supply was dropping off the grid.
Natural gas fired plants, wind farms and coal plants tripped offline due to the extreme cold brought by the winter storm, just as demand was increasing as households stayed in doors and turned up their heating systems.
Suddenly the supply vs demand dynamic shifted, and as Texas has got limited access to other power grid connections across the eastern United states and Mexico, it caused energy prices to spike. And US natural gas prices quickly hit 3 month highs.
The below chart shows how the various energy sources contributed during the cold spell. With the shortfall in renewable wind and solar energy sources being met by the more traditional fossil fuels, namely Natural gas, and to a lesser extent Coal.
Once the dust settles, the renewables vs fossil fuel debate may well become a focus of attention across the US southern states, to try and make sure that a similar failure to the power grid never gets repeated.
Along with the weather, that discussion should heat up over the coming months, and global energy prices may well become more volatile on the back of that ongoing debate.
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Originally published at https://chaipredict.com on February 23, 2021.