2024 Energy Highlights

Our Energy Economist, Dominic Whittome , shares his Energy Highlights Report for 2024. Dominic discusses the dynamics of crude oil, the future of the petro-dollar, natural gas market dynamics, and electricity prices. Each segment provides a brief overview with links to the full articles for those interested in a deeper dive.

Geopolitical Tensions and OPEC+ Strategies Shape Market Trends

Oil prices have been on a rollercoaster this year, starting with a steady rise. On April 5th, prices eclipsed $90/bbl following Russia and Saudi Arabia's agreement to extend production cuts well into 2025. The market was further jolted by missile attacks on Red Sea shipping and Russian refineries. After a dip below $78/bbl in early June, prices rebounded sharply to close above $86/bbl as hopes for ceasefires in conflict zones were dashed again.

Russia and other OPEC+ producers appear to have a vested interest in fanning inflation in Western economies despite their own revenue needs. In facing regional troubles, Saudi Arabia is cautious about increasing output to avoid the perception of siding with the West. While the market is up just 4% this year, any significant price increases from now on may go unchecked. The kingdom’s predicament benefits the hawks within OPEC+, who have various strategies to push oil prices into the triple digits, although no concrete actions have been seen yet.

Read more: 2024 Energy Highlights: Crude Oil

Abandoning the Petro-Dollar: A Strategic Shift

This year has seen significant developments that could redefine the global energy market. The potential abandonment of the petro-dollar, a move led by oil producers aiming to price exports in their own currencies or a new BRICS currency, is poised to shake up the market. This shift, replacing the US dollar’s dominance since 1971, could trigger sustained increases in oil prices.

Saudi Arabia's Integration into BRICS and Its Implications

Saudi Arabia's recent membership in BRICS underscores the bloc's growing influence. If BRICS successfully launches a trade currency backed by gold, we could witness a sharp revaluation of oil prices, especially if the US dollar declines in value. This move could have significant implications for global oil prices and the economies of oil-importing nations.

The Expansion of BRICS

BRICS has quietly expanded to 26 countries, with potential new members like Singapore and Japan. Trading energy commodities in BRICS-units could make them more expensive for countries with exposed currencies. This strategic shift may gradually phase in, but it holds the potential to fundamentally alter global trade dynamics and challenge the US dollar’s long-standing dominance.

Read more: 2024 Energy Highlights: Petro Dollar

European Gas Market Dynamics: Current and Future Outlook

The European gas market has seen stability in recent weeks, but a potential halt of Russian gas imports by next winter could shake things up. With Russia supplying significant LNG volumes to countries like France and Spain, the expiry of contracts in October might leave Europe competing fiercely for limited LNG supplies. This competition could drive prices higher, especially if winter temperatures are harsh.

ESAP Treaty and US LNG Imports

The UK is set to import more LNG from the US under the Energy Sustainability and Affordability Partnership (ESAP). This trade agreement will bring up to 10 bcm/y of US shale gas to the UK, potentially extending to European markets via the Bacton-Zeebrugge interconnector. However, with US gas prices at $50/MMBTU, significantly higher than current October prices, we could see a rise in wholesale prices as North Sea gas gets replaced by more expensive US imports.

Future of North Sea Gas Production

Despite recent revaluations indicating substantial North Sea reserves, over 150 fields are set to close in the next two years, and many exploration licenses will be handed back. This, coupled with the influx of costly US LNG, suggests a challenging future for UK gas production unless significant policy shifts occur to incentivize producers to return.

The Role of BRICS in Global Gas Reserves

Amidst these dynamics, it's crucial to note that 60% of the world’s proven gas reserves are held by three BRICS countries: Russia, Iran, and Qatar. This concentration of resources underscores the potential influence of BRICS in global energy markets, especially as Europe and the UK navigate these supply challenges.

Read more: 2024 Energy Highlights: Natural Gas

Electricity Prices and Market Trends

As recently as November 2023, electricity prices were on par with gas prices, both trading at ￡115/MWh and ￡115/therm, respectively. However, the situation has evolved, with electricity prices weakening after the ESO National Grid published reassuring medium-term scenarios. Despite some volatility in April and May, the market has remained relatively flat over the past two months, with the current wholesale price for a one-year base-load supply is approximately ￡85/MWh.

Breakdown of Additional Charges

For a typical small-to-medium-sized industrial consumer, the base price is just the beginning. Network charges and government surcharges significantly increase costs. The Balancing Services Use of System (BSUoS) charge adds 1.25 p/kWh, the Distribution Network Use of System (DNUoS) charge adds 2.5 p/kWh, and the Transmission (TNUoS) charge adds 1.5 p/kWh. Additionally, six separate climate change levies contribute 5.75 p/kWh, bringing the total to 19.5 p/kWh before considering the costs of shaping and delivering power, risk management, and supplier margins. This results in a final bill of around 23 p/kWh before VAT, significantly higher than costs recorded in Europe, the US, and China.

Climate Change-Related Levies and Final Consumer Pricing

UK consumers face high electricity costs compared to other regions due to additional climate change levies and network charges. Smaller and medium-sized industries also bear the Energy Intensive Industries’ Rebate surcharge, further increasing their costs. However, there's some good news: wholesale power prices have generally declined since December 2022 after being stubbornly high for 18 months.

Future Outlook and Grid Zero Initiatives

The UK’s annual power demand is projected to rise from 300 to 360 TWh by 2030, driven by the Grid Zero initiative. This 20% increase in demand will coincide with the shutdown of almost all UK reactors except Sizewell. This could lead to renewed pressure on power prices and network costs in the coming years.

Read more: 2024 Energy Highlights: Electricity

Author: Dominic Whittome

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator, and head of trading for four energy majors (Statoil, Mobil, ENI, and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

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