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Analys

Getting to zero, getting the job done

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SEB - analysbrev på råvaror
SEB - Prognoser på råvaror - Commodity

Politicians have been talking and talking for decades but with only marginal improvements in terms of emission reductions. Primarily because actually doing the job has earlier been technologically and economically almost impossible. Now suddenly renewable energy has come of age with prices set to decline yet further. And onshore transportation can soon be electrified cost efficiently. For politicians there is now a viable path. It is still a large task but now it is more and more about just getting the job done. In rough terms some € 150 – 250 bn per year to 2050 is probably needed to build EU’s new power system.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

In 2019 the EU + UK consumed 15,000 worth of fossil fuels. It all needs to be gone by 2050. In 2019 the EU + UK produced 3,200 TWh of electricity of which 1,295 TWh (40%) was fossil fuel based. Thus 60% of the power supply is already non-fossil. However, if we look at the larger picture of energy we see that the region consumed nearly 15,000 TWh of raw (evaluated pre-combustion) fossil fuels that year of which only 3,000 TWh was used for power. The remaining 12,000 TWh of fossil fuel consumption was consumed for heat, transportation, petrochemical and industrial uses. I.e. the lion’s share of fossil fuel consumption in the region is non-power related.

Thus getting to zero by 2050 is far more than swapping out of the 3,000 TWh of fossil fuels (pre-combustion) used for power supply today which post combustion creates 40% and 1,295 TWh of the regions electricity supply. The challenge is also about replacing the other 12,000 TWh of fossil energy for non-power uses.

As most know the conversion of fossil fuels to useful energy and work done is highly inefficient. In cars one rarely get more than 30% of the energy converted to useful driving with the rest just lost as heat. In large, power plants the conversion ratio is usually around 35% to 55% but mostly below 50%. Gas for heating purposes is of course highly efficient as almost all of it naturally is converted to heat.

The region is now aiming to go green by 2050 and that mostly means going electric. This again means that some 15,000 TWh of fossil energy spent today needs to be replaced by non-fossil based electricity. Given the highly inefficient burn of fossil energy to useful work it is no surprise that we don’t need the same amount of electricity output to replace it but rather something like only 30% to 50% as much.

When it comes to synthetically generated “electric fuels” (power to liquids or hydrogen) we are talking about an up to 200% replacement ratio because up to 50% of the electricity is lost in the conversion of power to liquids. But for most other purposes like electrifying transportation and replacing the burning of fossil fuels for power etc. the replacement ratio is often more like 30% to 50%. When it comes to replacing gas for heating purposes it is a one-to-one replacement.

In our calculations the region is going to need 6,731 TWh of new non-fossil based electricity by 2050 in order to replace the 15,000 TWh worth (pre-combustion) of fossil energy spent today. I.e. a replacement ratio of 46%. It is thus good news that we don’t need at total of 15,000 TWh of new non-fossil based power supply by 2050 but instead “only” 6,731 TWh.

This replacement is still huge! In comparison the supply of electricity in 2019 was 3,200 TWh (including fossil based power). I.e. the region needs to build its total power supply of today more than two times over by 2050 and at that point in time reach a total power supply of 8,574 TWh.

If we equate the challenge to the number of nuclear power units needed to cover it we are talking 570 new nuclear power units each of 1,500 MW capacity. In 2013 there were 131 operational nuclear power plants and today we are probably closer to 110. Thus to do the job by nuclear we need to increase nuclear power by more than 500% by 2050.

While the job is challenging it is by no means impossible. If we take the new UK Hinkley nuclear power plant as an example in terms of capex we have the following. It will generate about 25 TWh of electricity per year and cost about € 27 bn to build. I.e. €1.1 bn for a 1 TWh/year supply rate. Multiply by the needed 6,731 TWh/year of new power supply by 2050 and we get a needed capex € 7,147 bn in total which again equates to € 238 bn/yr over the next 30 years. Nuclear power is today considered to be a quite expensive source of new electricity with renewable energy often being significantly cheaper (up to 50% cheaper) though not providing baseload supply and rather intermittent supply.

Capex spending in the EU + UK should be in the ball-park of € 150 – 250 bn per year or 1.3% of GDP. Capex spending on new power supply over the coming 30 years should probably be in the ball-park of $ 150 – 250bn/year. And then some additional investments for a lot of infrastructure adaptation. EU and UK thus needs to spend some 1.3% of its GDP per year for the energy transition (€ 238 bn/yr divided by GDP of € 18,292 bn in 2019). But that of course assumes that there is no further declines in the cost of new renewable energy which by most measures is projected to continue to fall year by year. And going electric in the transportation sector (on land) will in not too long be a pure net saving as electric cars becomes cheaper than fossil cars while electric cars are also much more energy efficient than fossil cars.

The example of nuclear energy is for simplicity purposes. It is not in the cards at all today that the region is going big-time nuclear. The direction is rather much more renewable energy.

On the table we already have a pledge of 2,100 TWh/year of offshore wind by 2050. On the drawing table we already have an announced build-out of 300 GW of new offshore wind by the EU and 100 GW of offshore wind by the UK. Both by 2050. What does that mean? At a 60% offshore wind utilization ratio this equates to 2,100 TWh/year of new power supply by 2050. Thus already today a total of 31% of the new, needed 6,731 TWh by 2050 is firmly on the drawing table.

For many decades there has been endless political discussions about climate change. As a result we have moved a little forward but not all that much. We have gotten the European emission trading scheme (EU ETS) which is good and where we now have a decent carbon price of € 42/ton which starts to matter and where abatement (carbon reductions) is happening on the margin.

We have now come to the point where it is all bout getting the job done. To actually build what needs to be replaced. However, we have now gotten to the point of crunch-time. The time to act. The time to start the real change. Now it is about figuring out how to get to zero by 2050. Now it is all about getting the job done for real. Our sense is that thousands of engineers across Europe today suddenly are mapping out detailed plans of what we actually need to do to get there. It is not easy. It does not happen by itself. But it is absolutely doable and it will require some €150 – 250/bn per year in capex spending on new non-fossil based power supply over the next 30 years. But probably less than that as the cost of renewable energy continues to decline.

The region is not going to get to zero by 2050 by marginal abatement in the EU ETS emission system. The region is going to get there by outright building the alternative and then increasingly retiring the current system. And what it looks like already is that offshore wind is going to be a major part of the solution with plans already in place to solve 30% of the challenge.

IEA estimated in a report from 2019 that technical offshore wind power resources in Europe is 60,000 TWh worth of power supply. That is almost 10 times as much as what is needed to solve EU + UK’s goal of zero emissions by 2050. And as stated above the two have already committed to build 2,100 TWh/year of offshore wind power supply by 2050. So on the drawing table we are already one third of the way.

Norway is not really on the map here yet but it could easily offer to build 2,000 TWh of offshore wind power supply if EU agreed to buy it and pay for it at an agreeable price. If so this would lead to a real offshore wind bonanza over the coming 30 years equal to the build-out of the oil and gas on the NCS.

The EU + UK needs to kick the habit of consuming close to 15,000 TWh worth of fossil fuels per year by 2050 (evaluated pre-combustion). The replacement is going to happen by building the alternative and governments will be involved big-time to get it done. The current power supply for the region needs to be build more than two times over by 2050 to get the job done. 

Eu fossil energy
Source: SEB, EU stats

The EU + UK produced a total of 3,200 TWh of power in 2019 of which 1,295 TWh (40%) was generated by fossil fuels. In total the EU + UK will need 6,731 TWh of new non-fossil based power supply by 2050 in order to kick 15,000 worth of fossil fuels (evaluated pre-combustion) out the door. At that point total power supply in the region needs to be 8,574 TWh/year in order for the region to go green. Of the 6,731 TWh of new non-fossil power needed we already have a pledge by the EU and the UK together of 2,100 TWh of new offshore wind power supply by 2050. Thus 31% of the power needed to go fully green by 2050 is already pledged for through offshore wind. In the following graph ”EU” is short of ”EU+UK” for the sake of abbreviation.

Power supply in TWh/year
Source: SEB, EU stats

The following graph shows how much new non-emitting power supply the EU + UK needs for each sector to go electric and green by 2050. Today’s consumption of 15,000 TWh (pre-combustion) is mostly outside of the power sector. Some 1,900 TWh of current power supply can be kept for the future as it is non-emitting like nuclear, wind and other renewables. Total non-emitting power supply in the region needs to be 8,574 TWh by 2050 in order to go green.

Future power supply
Source: SEB, Euro stats

Technical offshore wind potential in Europe is close to 60,000 TWh per year according to a recent report by the IEA published in November 2019. Almost 10x of what the EU + UK needs to go fully green by 2050. And much of the capacity is in the North Sea between the UK and Norway.

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Analys

Brent gains on positive China data and new attacks on Russian oil processing

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SEB - analysbrev på råvaror

Positive China data and further attacks on Russian oil processing facilities lifts Brent yet higher. Brent crude gained 4.1% last week with a close on Friday 15 March at USD 85.3/b. Continued declines in US inventories, a bullish oil market outlook from the IEA and damages on Russia’s Rosneft Ryazan oil processing plant by Ukrainian drones helped Brent crude to break above the USD 85/b level. This morning Brent is adding another 0.4% to USD 85.7/b driven by a range of additional attacks on Russian refineries over the weekend and positive Chinese macro data also showing Chinese apparent oil demand  up 6.1% YoY for Jan+Feb.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Brent crude is getting a steady tailwind from declining US oil inventories. Steady and continued declines in US inventories since the start of the year has been nudging the oil price steadily higher but there has clearly been some resistance around the USD 85/bl level. US inventories continued that decline in data also last week with commercial crude and product stocks down 4.7 m b. Total US stocks including SPR declined 4.1 m b to 1580 m b which is now only 2 m b above the low point on 30 December 2022 at 1578 m b. These persistent declines in US oil inventories is a clear reflection of the global market in deficit where demand is sufficiently strong, cuts by OPEC+ are sufficiently deep while US shale oil production is close to muted with hardly any growth projected from Q4-23 to Q4-24.

Bullish report from IEA last week indicates that further inventory declines is to be expected. The monthly report from IEA last week gave an additional boost to this picture as it lifted projected oil demand for 2024 by 0.2 m b/d, reduced non-OPEC production by 0.2 m b/d and thus increased its estimated call-on-OPEC by 0.4 m b/d for 2024. The world will need steadily more oil from OPEC every quarter to Q3-24 and by Q4-24 the world will need 0.8 m b/d more from the group than it did in Q4-23. That is great news for OPEC+. There is no way that they’ll move away from current strategy of ”Price over volume” with this backdrop. The report from IEA last week is indicating that the gradual declines in US inventories we have seen so far this year will likely continue. And such a trend will give continued support for oil prices in the coming quarters. Oil price projections are lifted in response to this and last out is Morgan Stanley which raises its Q3-24 Brent forecast by US 10/b to USD 90/b.

SEB’s Brent crude forecast for 2024 is USD 85/b (average year) which implies that we’ll likely see both USD 70/b as well as USD 100/b some times during the year.

Attacks on Russian oil processing will mostly impact refining margins and crude grade premiums as crude supply is unlikely to be disrupted. The Ukrainian drone attacks on Russian oil infrastructure has surprised the market as many of them are deep within Russia. Facilities in Russia’s Samara region which is more than 1,000 km away from the Ukrainian border were attacked on Saturday. Oil processing plants and oil refineries are highly complex structures. If damaged by drones they can potentially be out of operation for extended periods. Plain oil transportation systems are much simpler and easier and faster to repair. The essence here is that we’ll likely not lose any oil supply while we might lose oil refining capacity due to these attacks. Most of the impact from these attacks should thus be on refining margins and not so much on crude oil prices. But when diesel cracks, gasoil cracks and gasoline cracks goes up then typically also light sweet crude prices goes up. As such there is a spillover effect from damages to Russian oil refineries to Brent crude oil prices even if we don’t lose a single drop of Russian crude oil production and supply.

Total US crude and product stocks incl. SPR has been ticking lower and lower so far this year and are now only 2 m b/d above the low-point in late December 2022. This is a solid indication that the global oil market is running a deficit.

Total US crude and product stocks incl. SPR
Source: SEB graph and calculations, Blbrg data

Total commercial crude and product stocks (excl. SPR) has been ticking lower and lower so far this year. This has helped to nudge oil prices steadily higher. 

Total commercial crude and product stocks (excl. SPR)
Source: SEB graph and calculations, Blbrg data

Brent crude looks very fairly priced at around USD 85/b versus current US commercial oil inventories

Brent crude looks very fairly priced at around USD 85/b versus current US commercial oil inventories
Source: SEB graph and calculations, Blbrg data

Call-on-OPEC by IEA: World will need more and more oil from OPEC through the year. In Q4-24 the world will need 0.8 m b/d more oil from OPEC in Q4-24 than in Q4-23.  

World will need more and more oil from OPEC through the year.
Source: SEB graph, IEA data

ARA refining margins have moved up so far this year => Refineries want to process more crude oil and thus they want to buy more crude oil.

ARA refining margins
Source: SEB calculations and graph, Blbrg data
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Analys

When affordable gas and expensive carbon puts coal in the corner

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SEB - analysbrev på råvaror

Coal and nat gas prices are increasingly quite normal versus real average prices from 2010 to 2019 during which TTF nat gas averaged EUR 27/MWh and ARA coal prices averaged USD 108/ton in real-terms. In the current environment of ”normal” coal and nat gas prices we now see a darkening picture for coal fired power generation where coal is becoming less and less competitive over the coming 2-3 years with cost of coal fired generation is trading more and more out-of-the money versus both forward power prices and the cost of nat gas + CO2. Coal fired power generation will however still be needed many places where there is no local substitution and limited grid access to other locations with other types of power supply. These coal fired power-hubs will then become high-power-cost-hubs. And that may become a challenge for the local power consumers in these locations.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

When affordable gas and expensive carbon puts coal in the corner. The power sector accounts for some 50% of emissions in the EU ETS system in a mix of coal and nat gas burn for power. The sector is also highly dynamic, adaptive and actively trading. This sector has been and still is the primary battleground in the EU ETS where a fight between high CO2 intensity coal versus lower CO2 intensity nat gas is playing out.

Coal fired power is dominant over nat gas power when the carbon market is loose and the EUA price is low. The years 2012, 2013, 2014, 2015 were typical example-years of this. Coal fired power was then in-the-money for around 7000 hours (one year = 8760 hours) in Germany. Nat gas fired power was however only in the money for about 2500 hours per year and was predominantly functioning as peak-load supply.

Then the carbon market was tightened by politicians with ”back-loading” and the MSR mechanism which drove the EUA price up to EUR 20/ton in 2019 and to EUR 60/ton in 2021. Nat gas fired power and coal fired power were then both in-the-money for almost 5000 hours per year from 2016 to 2023. The EUA price was in the middle-ground in the fight between the two. In 2023 however, nat gas was in-the-money for 4000 hours while coal was only in-the-money for 3000 hours. For coal that is a dramatic change from the 2012-2015 period when it was in the money for 7000 hours per year.

And it is getting worse and worse for coal fired generation when we look forward. That is of course the political/environmental plan as well. It is still painful of course for coal power.

On a forward basis the cost of Coal+EUA is increasingly way, way above the forward German power prices. Coal is basically out-of-the money for more and more hours every year going forward. It may be temporary, but it fits the overall political/environmental plan and also the increasing penetration of renewable energy which will push aside more and more fossil power as we move forward. 

But coal power cannot easily and quickly be shut down all over the place in preference to cheaper nat gas based power. Coal fired power will be the primary source of power in many places with no local alternative and limited grid capacity to other sources of power elsewhere.

The consequence is that those places where coal fired power generation cannot be easily substituted and closed down will be ”high power price hubs”. If we imagine physical power prices as a topological map, geographically across Germany then the locations where coal fired power is needed will rise up like power price hill-tops amid a sea of lower power prices set by cheaper nat gas + CO2 or power prices depressed by high penetration of renewable energy.

Coal fired power generation used to be a cheap and safe power bet. Those forced to rely on coal fired power will however in the coming years face higher and higher, local power costs both in absolute terms and in relative terms to other non-coal-based power locations.

Coal fired power in Germany is increasingly very expensive both versus the cost of nat gas + CO2 and versus forward German power prices. Auch, it will hurt more and more for coal fired power producers and more and more for consumers needing to buy it.

Coal fired power in Germany is increasingly very expensive
Source: SEB calculations and graph, Blbrg data

And if we graph in the most efficient nat gas power plants, CCGTs, then nat gas + CO2 is today mostly at the money for the nearest three years while coal + CO2 is way above both forward power prices and forward nat gas + CO2 costs. 

EUR/MWh
Source: SEB calculations and graph, Blbrg data

Number of hours in the year (normal year = 8760 hrs) when the cost of coal + CO2 and nat gas + CO2 in the German spot power market (hour by hour) historically has been in the money. Coal power used to run 7000 hours per year in 2012-2016, Baseload. Coal in Germany was only in-th-money for 3000 hours in 2023. That is versus the average, hourly system prices in Germany. But local, physical prices will likely have been higher where coal is concentrated and where there is no local substitution for coal in the short to medium term. Coal power will run more hours in those areas and local, physical prices need to be higher there to support the higher cost of coal + CO2.

Number of hours in the year
Source: SEB calculations and graph, Blbrg data
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Analys

War-premium back on the agenda?

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SEB - analysbrev på råvaror

During yesterday’s trading session, Brent Crude made significant gains, marking the largest increase in global oil prices in approximately five weeks. The front-month contract is presently trading at USD 84.3 per barrel, reflecting a robust increase of USD 2.55 per barrel (above 3%) compared to Monday morning’s opening price.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Furthermore, US crude inventories, excluding those held in the Strategic Petroleum Reserve (SPR), experienced a notable decline for the first time in seven weeks. This decline suggests a heightened global demand for crude oil, which has played a pivotal role in driving up prices (further details below).

Additionally, of considerable significance is Ukraine’s unexpected success in executing precise drone strikes targeting key Russian oil infrastructure. Yesterday, Ukrainian drone strikes triggered a fire at Rosneft’s Ryazan plant, which has a daily production capacity of 340,000 barrels near Moscow. This facility is a significant provider of motor fuels for the capital region and stands as one of Russia’s largest crude-processing facilities. Notably, this incident marks the third Ukrainian drone attack on Russian refineries this week, following similar incidents at the Novoshakhtinsk and Norsi refineries.

Ukrainian strikes in Russian territories ”appear to aim at disrupting, if not influencing, the Russian elections,” Putin stated in an interview with the RIA Novosti news service released Wednesday. He added, ”Another objective seems to be securing leverage for potential negotiation purposes.”

i.e., we believe the statements suggest that Ukrainian strikes in Russian regions are perceived by Putin as strategic moves with dual purposes. Firstly, they are seen as attempts to disrupt or influence the upcoming elections in Russia, potentially destabilizing the political landscape or casting doubt on the legitimacy of the electoral process. Secondly, they are interpreted as efforts to gain leverage in possible negotiation scenarios, implying that Ukraine seeks to strengthen its bargaining position by demonstrating its capability to inflict economic and strategic damage on Russia.

From a market perspective, it’s crucial to highlight the escalating conflict between Ukraine and Russia, which poses a significant threat to global energy markets. Russia’s role as a major oil and gas supplier is paramount, and any disruptions in its energy infrastructure could lead to widespread supply shortages and price volatility worldwide. The recent drone strikes are a clear reminder that geopolitical tensions continue to impact global oil markets. The fading ”war-premium” should now be factored in more significantly, indicating a need to brace for increased volatility ahead.


An overall significant drawdown of US inventories. In the U.S., commercial crude oil inventories, excluding those in the Strategic Petroleum Reserve, dropped by 1.5 million barrels from the prior week to 447.0 million barrels, about 3% below the five-year average. Total motor gasoline inventories fell by 5.7 million barrels, also about 3% below the five-year average. Distillate fuel inventories rose by 0.9 million barrels, approximately 7% below the five-year average. Propane/propylene inventories increased by 0.7 million barrels, marking an 8% rise compared to the five-year average.

Overall commercial petroleum inventories decreased by 4.7 million barrels. Over the past four weeks, total products supplied averaged 19.9 million barrels per day, up by 1.0% from the same period last year. Motor gasoline product supplied averaged 8.7 million barrels per day, down by 1.3% from the same period last year. Distillate fuel product supplied averaged 3.7 million barrels per day over the past four weeks, up by 0.5% from the same period last year. Jet fuel product supplied increased by 2.0% compared to the same four-week period last year.

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