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Opec puts the power of the Russian price cap to the test

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Welcome back to Energy Source.

The dust is still settling after the big Opec+ supply cuts. One consequence is that it’s likely to make the west’s price cap on Russian crude even more difficult to maintain, as I write in our first note. Myles looks at US government data showing American crude and fuel exports at all-time highs. And Amanda reports on how the coal industry’s long-term decline is back in focus.

PS Check out this story on how clean energy’s surge up the geopolitical agenda thrust China’s CATL, the world’s largest battery maker, from “blissful obscurity” into the crosshairs of political leaders in Washington and Beijing.

Thanks for reading — Justin

How Opec’s oil supply cut could help Russia

The Opec+ surprise oil supply cuts have thrown up a host of new problems for western leaders. First, it raises the likelihood of another summertime surge in prices at the fuel pump. That in turn would make central banks’ fight against inflation, and fending off a recession, all the more difficult.

The supply cuts could also complicate another top priority in Washington and European capitals: starving Russian president Vladimir Putin’s war machine of cash as the invasion of Ukraine continues.

The west has deployed a price cap to try to restrict the flow of petrodollars going to Moscow, while ensuring its barrels continue to make their way on to a global market that still needs them.

As a reminder, at $60 a barrel, the price cap aims to put a ceiling on the price of Russian seaborne oil sales that use western shipping and financial services. That price point makes it just attractive enough for Putin to keep oil flowing, while limiting upside from rallying crude prices, policymakers have argued.

Western policymakers have argued it has been a success up to now. “What is indisputable is that through our actions, we have dented Russian oil revenues and that there have been no shocks to global energy markets,” Ben Harris, a leading architect of the policy at the US Treasury, said in a recent speech.

But as Karim Fawaz, an analyst at S&P Global, points out, the success of the policy has been helped by a loose crude market, with lower prices and excess supply. With market prices for Russian crude trading below the price cap, it hasn’t really been put to the test.

But if the Opec+ cuts successfully tighten supply and start to force prices higher, it would improve “the market landscape for Russian barrels”, Fawaz wrote in a recent note. That would force policymakers “to make a tough decision,” he added.

If the market price for Russian crude surges above $60 a barrel, will western policymakers maintain strict enforcement of the price cap? That would risk taking even more barrels off the market, magnifying the Opec+ cuts and potentially adding fuel to an oil price surge. Or do they ease sanctions enforcement in the name of protecting consumers from pain at the pump and allow Putin to stockpile oil revenues? That could strengthen Russia and expose tensions that have so far been kept at bay within the western alliance.

Those tough decisions could some sooner rather than later. Reuters reported yesterday that rising Brent prices after the Opec+ announcement and strong demand from Russian and China have already pushed the price of Urals, a crucial Russian international benchmark, above the $60 a barrel price cap level.

“We are trying to thread the needle here, maintaining current levels of [Russian] production, obviously at the lowest prices possible,” a senior US official recently told me.

That’s about to get trickier to pull off. (Justin Jacobs)

US energy exports scale new heights

Whatever the status of Russian exports, American oil and gas producers are continuing to capitalise on the disruption.

US crude shipments over the four weeks to the end of March were 4.95mn barrels a day — a new record — according to data released yesterday by the Energy Information Administration.

That is 18 per cent higher than the previous four weeks and almost 50 per cent higher than the same time last year.

Adding gasoline, diesel, propane and other fuels, exports were a whopping 11.24mn b/d over the same period — also a record.

But it is not just oil. Liquefied natural gas exports are also rocketing towards new heights as the Freeport LNG terminal cranks back into gear, after an explosion last year put it out of action.

LNG exports jumped 12 per cent in March, according to preliminary data from consultancy Kpler, to 7.25mn tonnes. That is more or less on a par with last year’s peak and sets April up to be a record-setting month.

The soaring exports in oil and gas underline the US’s newfound role as an energy exporting superpower and critical fuel supplier to global markets.

For now, with gas prices depressed and oil prices well off their highs, that is not ruffling feathers in Washington.

But it is less than a year since the Biden administration spooked exporters by threatening potential export controls in a bid to reduce the pressure at the pump for US motorists.

If oil prices continue their ascent, exports are certain to return to the political limelight. (Myles McCormick)

Data Drill

US coal prices have plunged from their record highs of last year, putting the focus back on the industry’s long-term decline.

Central Appalachia coal prices averaged $85 a short tonne yesterday, down nearly 60 per cent from their record highs in September, according to Platts of S&P Global Commodity Insights. Prices for Illinois Basin coal prices are also down 60 per cent from their summer peak, according to the US Energy Information Administration.

The rapid deflation comes amid falling gas prices, milder winter temperatures curbing fuel demand, and increased competition with renewables. US coal prices surged last year as Europe’s scramble to move away from Russian gas and a scorching summer added pressure to domestic supply.

“Now that winter is over and European ports are well-stocked with coal, global prices have dropped significantly. This has in turn put downward pressure on US domestic spot coal prices,” said Morgan Snook, associate pricing editor of coal at S&P Global Commodity Insights. The analytics firm expects 21GW of coal plants to retire in the US this year alone.

Line chart of Central Appalachia coal spot price showing US coal prices plunge from record highs

With falling demand and more plant retirements, analysts don’t expect a similar resurgence in coal prices.

A report released this week by the Institute for Energy Economics and Financial Analysis found that the US is transitioning away from coal faster than expected. The IEEFA expects the US to close half of its coal generation capacity by 2026, the earliest date since it began tracking closures.

Earlier this week, President Joe Biden announced $450mn in funding for clean energy projects located in former or current coal mines as part of the administration’s effort to include coal country in the energy transition. The Treasury also released guidance on how these projects can receive a bonus tax credit in the Inflation Reduction Act. (Amanda Chu)

Column chart of showing US will retire half of its peak coal-fired generation capacity by 2026

Power Points

Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at energy.source and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.

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