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40$/bbl Consensus - Barış Sanlı

We are moving into a divergent world. On the US side, a 180-degree turn on energy policies is expected. In Europe, the lockdown is back. In Asia, growth is more or less back on track. So we see a three tier response to a very big crisis. But oil prices are still around the magnetic 40$. Will it stay so?

No, lower in the Q4, higher in the 2021Q1 and Q2. This is the short answer. The long answer is, you know, complicated. Therefore it is better to keep track of 3 benchmark prices across the globe. In Europe, TTF futures are losing steam in the front end. This front end will be heavily influenced by weather patterns. Henry Hub prices are more or less stuck at the current levels. Coal prices are unusually dipping below their seasonal levels.

This will further accelerate coal to gas switching in the US. If states implement carbon prices, this will be amplified. US coal losing ground will have implications for the Asian world. This may also dampen the gas demand growth(not demand bu demand growth) in the short and medium-term. In Europe, gas switching is inevitable. But there is one glitch about whether more renewables be harder to manage.

Will China increase the speed of energy transition? Or which energy transition we should say. Regional governments may strive to keep employment. The change in China is slow, and state policies -as always- will be important. But PipeChina’s progress is an interesting topic. But progress never guarantees results. The main item to watch on that front is whether the shale revolution/or “golden gas age” will have a Chinese version.

US presidential election results will impact this energy world. But how? That is the question. Most of the efforts are on the transition team or related developments. The presidents may have an agenda, but they are not all that powerful figures to shape these agendas. Generally, historical developments shape presidential terms. How the presidents respond to these developments is their legacy.

As we see a replay of “All of the above Deal”s, we have to be careful about their successes. The original “New Deal” was always hailed as a success. But there are other ideas such as the 2nd world war was another stimulus that may be comparable to New Deal. This may be a sideshow. But progress in renewables may not come from “Deal”s but from another aspect. I can’t define this, but it will surely emerge from the need for growth.

The biggest hurdle is our lack of understanding of innovation. Not the necessity of it, but how to achieve the targeted innovation with commercialization targets. Efficiency is the buzzword for every crisis. Innovation is like a sibling of efficiency. But whether these two will save the lower-middle-income group from deep unemployment is doubtful. They are necessary.

By 2020Q2, the 40$/bbl consensus will be long gone, and we will be discussing much higher prices. But the new norm created by the Covid19 has not been settled yet. It sowed the seeds of new instability. The end of 40$/bbl consensus.


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