Fuel for Thought – Jan 20th

20 Jan, 2012

Energy efficiency deserves better:  Despite clear evidence that substantial reductions in energy demand are required for Europe to have any chance of meeting it’s decarbonisation targets, most European governments seem incapable of delivering effective policies to improve energy efficiency. The latest example of weak policy is the recently announced UK Green Deal.  The UK government is redesigning the UK power market and providing massive support for large scale low carbon generation projects, but is cutting efficiency subsidies and relying on consumer borrowing to fund building efficiency improvements.  As a result the Green Deal is a deeply flawed framework for delivering efficiency improvements, as the governments own numbers appear to show.  Not only is there a clear case for supporting energy efficiency on the grounds of relative cost, but upfront support for building improvements would provide a much needed boost for employment in the ailing housing industry.  The Green Deal is another triumph of conflicting political agendas over common sense.

Gazprom gives ground on contracts: There have been some positive signs for gas suppliers in their ongoing battle with Gazprom over long term contract prices.  Weakening gas demand and a widening discount of spot versus contract prices is threatening Gazprom’s market share.  As a result the Russian gas monopoly has agreed to cut contract prices although it has not yet conceded to increase the amount of spot indexation in contract price formulas.  Arbitration continues but there are positive signs that Gazprom’s defences are cracking, particularly since their largest competitor Statoil has already given ground on spot indexation.  The divergence between spot and contract prices continues to act as a much needed catalyst for the evolution of gas hub pricing and liquidity. 

2012 commodity price recovery? The price of ‘risk assets’ including many commodities (particularly oil and gold) has shown signs of recovery over the last month.  But there are some underlying market trends which sit uncomfortably with this rally, suggesting it will only be temporary.  Firstly the US dollar, which has shown a strong inverse correlation to commodity prices over the last few years, has continued to strengthen.  Secondly, relative weakness in the prices of industrial commodities and shipping continue to point to a slowdown in global growth.  Coal prices are particularly susceptible to a slowdown in China which accounts for almost half of global coal consumption.  A lot more evidence is required to call an end to the decline in commodity prices which began in the first half of 2011.

Picture of the Week:

The Strait of Hormuz is a narrow band of water that connects the Persian Gulf with the Arabian Sea.  Earlier this month Iran threatened to close the passage in response to rising tensions with the US and Europe over its nuclear program.  Around one fifth of the world’s oil and Qatar LNG exports pass through the Straight so regardless of whether the threat was just rhetoric it highlights the shadow of geopolitical risk in the global energy markets.