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The Energy Report: Inflation Not the Only Risk We Face

Published 07/10/2024, 09:14 AM

Fed Chairman Jerome Powell knows how to throw cold water on a commodity rally, and he did so after he told a Senate Banking Committee that inflation is not the only risk the economy faces.

And while I can scare myself to sleep thinking about the many risks posed by this government's reckless spending and crazy foreign policy moves, one risk that is real and one that we have been warning about is a coming energy shortfall created by crazy climate policies and crazy regulations.

And while folks believe that those concerns are somewhere far off in the future, the reality is, that it’s a small way, and we are already there.

The Energy Information Administration (EIA), in their Short-Term Energy Outlook, not only raised their price and demand projections but acknowledged that we are going to see a supply versus demand imbalance when it comes to oil.

In plain English, the EIA said that global oil demands this year will reach a record 103.80 million barrels a day. But at the same time, their projection of daily global oil production is within 101.98 million barrels a day, which means that based on those assumptions, we will see global oil inventories decline by 1.82 million barrels every day.

The EIA says they estimate that global oil inventories will only fall by 0.5 million barrels per day (b/d) in 1H24 and will fall by 0.7 million b/d in 2H24. Because of that, the EIA also had to raise their oil price forecast. Now they are saying that Brent crude will average $89 a barrel in the second half of the year, up from $84 a barrel in the first half of the year.

Regardless of how you do the math, it’s clear that because we’re heading into a supply deficit, the chances of upside price spikes have increased.

Any weather-related supply disruptions or geopolitical events could leave the market vulnerable. And the market must consider this risk, especially because we have seen our strategic petroleum reserves gutted in recent years. This comes as EIA had to raise its 2024 demand estimate to 1.11mbpd (from 1.08) and raise the 2025 estimate to 1.77mbpd.

On the plus side, the EIA said that gasoline expenditures are not as bad as you might think. They say that a combination of falling gasoline prices, increased vehicle efficiency, and rising incomes means U.S. households will spend about 2.3% of disposable income on gasoline in 2024 and 2.2% in 2025, which is lesser than average for the 2015–2023 period.

Even though that may be the case when directly tying gasoline prices to income, it doesn’t consider the fact that inflation is much higher than it was from 2015 to 2023. That is why this pronouncement for the average consumer doesn’t really make them feel much better.

Still, the EIA projects a regular-grade retail gasoline price of around $3.50 per gallon (gal) for 2025, which is slightly less than the 2023 annual average and $0.50/gal less than the 2022 annual average.

Yet the real issue going forward is the ability to power the economy of the future. The economy of the future is not electric cars but on the bill to power artificial intelligence and data centers, which will consume massive amounts of electricity. This cannot be powered by interruptible resources, and while the Energy Information Administration counts the fact that wind power is the fastest-growing source of energy, it is inefficient, and wind energy is losing its wind.

The EIA reported that the amount of offshore wind generating capacity that is under construction or planned in the United States is in flux after two projects in New Jersey were canceled last year. Of the 7,200 megawatts (MW) of capacity reported in May in EIA’s latest Preliminary Monthly Electric Generator Inventory, projects totaling about 2,400 MW have been canceled since last December.

Others totaling 4,800 MW remain active in various stages of development. Besides, the EIA said that “Electric vehicles are only expected to account for 7% of light vehicles by 2030. Yet the power grid is going to have to expand quickly to meet demand and keep our economy dynamic.

The EIA said, “The U.S. electric power sector generated 5% more electricity in 1H24 than 1H23 because of a hotter-than-normal start to summer and increasing power demand from the commercial sector. They are calling for a 2% increase in U.S. generation in 2024 compared with 2023, with solar power, the fastest growing U.S. source, generating 36 billion kilowatt-hours (BkWh) more electricity in 2024 than in 2023 (an increase of 42%).

They say that after reviewing the responsiveness of fossil fuel generation to natural gas prices, we now expect more power generation from coal and less from natural gas than we did in our previous forecast, especially during the winter.

The EIA on natural gas said that the Henry Hub natural gas spot price will average almost $2.90 per million British thermal units (MMBtu) in 2H24, up from $2.10/MMBtu in 1H24.

They say that “natural gas prices fell in early 2024 because of mild winter weather that reduced demand for natural gas for space heating. However, low prices reduced natural gas-directed drilling and led producers to curtail some production".

They expect dry production of U.S. natural gas in 2024 to remain near 104 billion cubic feet per day (Bcf/d), compared with a record of more than 106 Bcf/d in December 2023.

Natural gas inventories: At the end of June, there was 19% more natural gas in U.S. inventories than the five-year average (2019–2023). We expect less natural gas injected into storage than the five-year average this summer season because of relatively flat production in 2024 and a seasonal increase in demand from the electric power sector. They forecast inventories will end the injection season in October with 6% more natural gas in storage than the five-year average.

We are facing a very tight market for oil and gas natural gas is holding up pretty well, suggesting that a bottom is in the making. Be sure to hedge on your oil and gas needs.

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