At a time of high uncertainty in energy markets, a few trends and issues are changing the world and disrupting the global landscape. Geopolitical factors are influencing the oil and liquefied natural gas (LNG) markets. Many countries have introduced new carbon schemes to reduce emissions, while the European Union is overhauling its plan and Australia has repealed its carbon legislation. Fracking and horizontal drilling have led to an extraordinary boom in US oil production. And Germany is transitioning its electricity-generation mix away from nuclear and toward renewables and coal.
A summary of a few of these topics is discussed below.
Progress in global carbon schemes
The EU Emissions Trading Scheme (EU ETS) has endured another politically hectic year as lawmakers attempt to tackle the market’s persistent oversupply. Nonetheless, subsequent new global carbon schemes are appearing around the world undeterred. The world’s second-largest trading scheme (behind the EU ETS) is set to start in 2015 in South Korea, likely in response to it becoming the fastest-growing emitter in the Organization for Economic Co-operation and Development (OECD) following rapid economic growth. Over 400 South Korean businesses are expected to participate in the cap-and-trade plan. There are a number of other schemes across the globe at various stages of their development, from China, to the United States, and New Zealand to Kazakhstan. Despite the different challenges faced, each scheme is united by the same target: to reduce emissions.
Geopolitics affecting the global LNG markets
A rapidly changing global liquefied natural gas (LNG) market has seen a number of market gyrations in 2014 to make prices extremely volatile, while an additional dynamic has entered the fray: geopolitics. 2014 started with record-high Asian LNG prices, as demand from Japan pushed prices north of $20/MMBtu. As the largest global consumer, Japan is a key driver of global LNG prices. Japan is the fifth-largest energy-consuming nation in the world and relies on natural gas–fired generation to meet approximately half of its electricity needs. The Fukushima nuclear disaster in early 2011 caused the country to take all its nuclear generation offline. In the second quarter of 2014, Japan saw demand weaken while the opposite happened in Latin America — specifically Brazil. As the country prepared to host the World Cup, it was simultaneously experiencing a severe drought. Fortunately, falling LNG demand in Asia helped to usher global prices lower, but the higher-cost substitute to hydro generation caused Brazilian electricity prices to rally immensely.
The revival of US energy self-sufficiency
It is nearly impossible to talk about the global energy complex without discussing the US energy boom, for it has been as powerful as it has been improbable. And given the current outlook, there is still plenty of mileage left in this modern-day oil boom. The contribution of fracking to oil production a decade ago was negligible; a result of which was not only a 62-year low in US oil production, but a corresponding record high in oil and petroleum-product imports. Less than a decade ago, the United States was reliant on the rest of the world (specifically Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria) to meet 60% of its consumption needs. It is not just surging production that has been startling. It is also the fact that production has only come from a few shale plays. The Bakken in North Dakota and the Eagle Ford and Permian Basin in Texas make up virtually the entire surge in production. These two states now account for basically half of all US oil production.
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Matt Smith is a global energy commodity analyst who provides oil and natural gas analysis and commentary to dozens of national and international media outlets, including CNBC, Fox Business, the Wall Street Journal, MarketWatch, Bloomberg, CNN, AFP, Reuters, and The Oil Daily. Matt specializes in extracting key themes from technical and fundamental analysis of the market. He also covers energy and financial markets on his blog, EnergyBurrito.