The COVID-19 pandemic that has rocked the global economy has been sharply felt in energy markets. Slowing economies and reduced travel have reduced energy use. Oil prices collapsed when a Russian-Saudi price war broke out at the start of the pandemic. Continued infection rates and threats of second lockdowns in many developed economies has resulted in weak energy demand growth.
Oil prices are now camped around USD$40 per barrel (Brent) which is above the low price of $25 recorded in April but well down on the USD$60-$70 price range they tracked until February.
The effect in Australia has been sluggish investment in most energy vectors: new renewables have dropped sharply off world record pace last year. Wholesale prices remain soft which has reduced the incentive for corporates to contract renewable off takes to reduce their scope 2 emissions.
The commercial case for batteries is weaker as the arbitrage spread is reduced in a soft market, although the value of FCAS services is less affected. Gas peakers are still looking at strong cap prices in NSW, Victoria and South Australia this summer, and softer fuel costs.
The emerging concern is that early optimism of a market re-set by the end of the year hasn’t yet materialised. Demand for distillates like diesel and jet fuel has fallen so dramatically that over production has forced some traders to hire tankers to store surplus product.
This glut in these fuel types is dragging down oil prices despite falling inventories for crude. There remain concerns that demand has plateaued as supply from oil producing nations has increased back to pre-COVID levels. Global oil demand has recovered to 92 million barrels a day, down from the 100 million bpd recorded at the start of 2020.
OPEC oil producers have been keen to get supply and revenues back up to pre-COVID levels while many US shale producers have switched production back on to pay off their debts. The combined effect is to bring oil production in line with demand, but with large inventories unable to clear, softening prices.
The US Energy Information Administration is expecting oil inventories to remain oversupplied until deep into 2021, which, if true, is likely to translate into sustained weakness in gas and electricity prices in Australia. But then, as we are trying to predict an unprecedented global pandemic, who knows what happens next?