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SEB Jordbruksprodukter, 18 februari 2013

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SEB Veckobrev med prognoser på jordbruksråvaror

SEB - Prognoser på råvaror - CommodityDet är en något mindre del av USA som är drabbat av torka i den senaste veckans Drought Monitor-rapport, än veckan innan. Frågan är om detta nu är början på mindre torka, bättre utsikter för en god skörd och därmed lägre pris. Det är (nästan) alltid på våren och sommaren som skörden och därmed priset avgörs.

Extremt torrt väder

Vädret i Brasilien fortsätter att vara bra. Vädret i Argentina ser ut att förbättras. I Ryssland är det blandat. Det finns faktiskt risk för torka. Den som följt med i temperaturen på potentiella semesterorter, har kanske noterat att det är uppåt 30 grader varmt vid Svarta Havskusten.

Vete

Priset på november (2013) kontraktet slutade 1% lägre än förra veckan, efter att ha börjat med ett kraftigt prisfall ner till 210 euro innan rekylen uppåt kom. 210 euro är ett tekniskt stöd. Bryts detta på uppsidan i veckan som kommer, är prisfallet från början av december troligen hejdat för ett tag framöver. Men det mest sannolika är att priset vänder ner igen för ett nytt test av 210-nivån.

TA-analys på vetepris

Nedan ser vi decemberkontraktet på CBOT, som inte lyckades rekylera upp lika mycket som Matif, efter att ha inlett veckan med prisfall. Det finns en gammal stödnivå på 755, som även fungerade i veckan som gick. Det finns också ett motstånd på 779 cent. Däremellan ligger nu marknaden. Frågan är vilket av stödet eller motståndet som ska brytas. Vi skulle gissa att stödet bryts, baserat på hur kursutvecklingen brukar bli när det är så här. Det finns i så fall potential för priset att falla ner mot 700 cent, eller strax däröver, det vill säga in i det prisintervall som vetet handlade i under förra våren.

W Z3 - TA-analys på vete den 18 februari 2013

Vi ser i diagrammet nedan att Chicago-terminerna fallit över hela linjen. Notera också de konstiga priserna på de allra längsta terminskontrakten.

Utveckling för terminer på chicago-vete

Det amerikanska jordbruksdepartementet USDA kom ut med sin långtidsprognos nu i veckan som sträcker sig fram till 2022. Prognosen för vete 2013/14 visar en ökning med 3% på årsbasis för sådd areal till 57.5 miljoner acres, vilket är den högsta nivån sedan 2009, men under de kommande åren förväntas sådd areal att fortsätta den historiska nedgången. Skördad areal förväntas hamna på 48.5 miljoner acres, vilket är 3% lägre än under 2012 som en följd av grödornas dåliga tillstånd. Långtidsprognosen innehöll också USDA’s första prognos för 2013 års veteproduktion som förväntas uppgå till 2,190 mb, vilket är en minskning med 79 mb jämfört med 2012, men den största produktionen under prognosperioden fram till 2022. Den genomsnittliga avkastningen 2013 beräknas uppgå till 45.2 bu/acre, och förväntas därefter att öka stadigt under åren för att 2022 uppgå till 48.6 bu/acre. Prognosen för ingående lager av vete per den 1 juni 2014 är satt till 733 mb, jämfört med estimatet för 2013 som ligger på 704 mb. Ingående lager 2015 förväntas uppgå till 804 mb, vilket skulle vara den högsta nivån under hela prognosperioden.

Vetetabell

Strategie Grains justerar ned sin prognos för EU’s produktion av vete 2013/14 med 1.1 mt till 132.2 mt, som en följd av det blöta vädret i Storbritannien och lägre areal i Frankrike. SG säger att kontinuerliga regn begränsade sådden av höstvete i Storbritannien medan ny information har lett till en minskad uppskattning av vete arealen i Frankrike. De båda ländernas sammanlagda produktion justeras ned med 1.4 mt jämfört med förra månaden, något som dock uppvägdes något av marginellt högre skördeestimat för Litauen, Tjeckien, Rumänien och Bulgarien.

FranceAgriMer säger att EU:s lantbrukare kan komma att öka skördearealen för vete i år med 3% genom ökad sådd i Polen och Rumänien. Arealen förväntas uppgå till 23.8 miljoner hektar mot förra årets 23 miljoner hektar. Frankrikes vete areal kan komma att öka med 3 procent, medan arealen i Tyskland, Polen och Rumänien förväntas öka med 3%, 10% och 9% respektive. Även i Spanien, Italien och Ungern förväntas vetearealen bli högre i år än förra året. Arealen för vete i Storbritannien förvänts däremot att minska med mer än 200 000 hektar till 1.78 miljoner hektar på grund av att sådden försvårades av det kraftiga regnandet, framförallt i de östra delarna av landet.

Per den 11 februari klassas 66% av vetet i Frankrike som ”good/excellent” enligt FranceAgriMer i en den första rapporten efter vetets vintervila. Den förra rapporten som släpptes den 3 december, före vintervilan, låg på 74% good/excellent. För ett år sedan var 82% i good/excellent skick.

De två största veteodlingsområdena i Frankrike, Centre och Picardie har fått dubbelt så mycket regn under december som normalt. Utsädesföretaget Groupe Limagrain rapporterar att det finns skador på grödan i alla regioner där det regnat för mycket och marken är mättad av fukt. I tabellen nedan ser vi att Centre har en högre andel vete i dåligt skick än alla andra landsdelar.

Status på vete i Frankrike

Utsikterna för Kinas grödor har återigen aktualiserats. Lokala USDA analytiker säger att veteproduktionen 2012/13 beräknas till 108 mt på grund av problem med fusarium i stora veteproducerande regioner såsom Anhui, Hubei, Jiangsu och Henan provinsen. Detta skulle vara betydligt lägre än den officiella siffran på 121 mt. Slutsatsen man kan dra av detta är att Kinas import av vete därmed kan vara mycket högre än tidigare väntat och vi hör från våra kontakter i marknaden att det ryktas om att Kina nyligen har köpt vete från USA och Australien.

Mellan augusti 2012 och januari 2013 steg det lokala vetepriset från 2169 RMB till 2360 RMB per ton, en ökning med 9 procent, vilket enligt FAS skulle kunna vara en stark indikation på att veteproduktionen och det totala tillgängliga utbudet är lägre än de kinesiska officiella produktionsestimaten. Nedan ser vi priset på spotkontraktet på Matif och Ex-warehouse vetepris i Shanghai, också i euro per ton (omräknat).

Spotpris på Matif-vete och Ex-warehouse

Vi fortsätter vår neutrala vy på vetet. Tekniskt lutar det åt lägre pris. Det verkar som om marknaden tagit fasta på att torkan i USA visar tecken på att ha toppat ur. Orosmoment som risken för torka i Ryssland och risken för större importbehov i Kina har hittills inte lyckats gripa tag i marknadens aktörer.

Majs

Majspriset (december 2013) nådde 550 cent, vilket var det ”mål” vi nämnde för ett par veckor sedan. Vi tror att den rekyl vi såg mot slutet av veckan är en så teknisk så kallad ”flagga” och att priset kommer att vända ner igen. Nästa stöd finns på 530 cent. Dit tror vi att priset går.

TA-analys på majspriset den 18 januari 2013

Veckovis etanolproduktion i USA har hämtat sig sedan den 25 januari när den nådde den rekordlåga nivån 770,000 fat / dag.

Veckovis etanolproduktion i USA

USDA:s långtidsprognos fram till 2022, visar att sådd majs areal i USA förväntas bli den näst största under 2013 och produktionen förväntas uppgå till rekordhöga 14,435 mb.

USDA om majssådd i USA

I förra veckan kom Buenos Aires Grain Exchange (BAGE) med sin första prognos för Argentinas majsproduktion 2012/13, som förväntas uppgå till rekordhöga 25 mt, vilket är en ökning från förra årets 21.5 mt när torka drabbade grödorna. BAGE:s prognos är dock betydligt lägre än USDA:s. I den senaste WASDE-rapporten angavs väntad skörd enligt USDA till 27 mt. Argentina är världens tredje största exportör av majs och oro över det torra vädret i Argentina har gett stöd åt de internationella priserna pga låga lager efter torkan i USA under förra säsongen. Den senaste veckan har dock landet fått spridda skurar över delar av provinserna Cordoba, Santa Fe och Buenos Aires men mer nederbörd behövs. Svalare temperaturer och en hel del nederbörd förväntas i de norra delarna under kommande vecka, medan torkan förväntas fortsätta i de centrala delarna.

Väderprognos för Sydamerika

Strategie Grains justerar upp sin prognos för EU:s produktion av majs 2013/14 med 0.9 mt till 63.7 mt, som en följd av införandet av officiella uppskattningar för Tyskland och Ungern i kombination med ett skifte av areal från höstgrödor. Vi fortsätter att ha en neutral (till negativ) vy på majs.

Sojabönor

Sojabönorna (november 2013) fortsatte att röra sig nedåt, efter det stora prisfallet när WASDE-rapporten publicerades. 1254 cent är ett viktigt stöd. Bryts det kan prisfallet bli stort.

TA-analys på sojabönor

Norra Argentina / södra Braslien, som har varit torrt har blivit fuktigare och Mato Grosso, där det nu skördas, har det blivit torrare. Perfeito, tycker de säkert.

Om USA nu verkligen skulle bli mindre torrt, kan priset på sojabönor inleda en trend nedåt. Medan det är väldigt ”tight” för gammal skörd, tycks det kunna bli en mindre ansträngd situation för den nya skörden och det nya marknadsföringsåret.

Raps

Rapspriset (november 2013) har fortsatt att röra sig ”sidledes” med ganska tvära kast. Det verkar finnas fyndköpare på 420 euro per ton. Det verkar också finnas en hel del spridda säljintressen kring 430 euro.

TA-analys på rapspriset

ABARE höjde den australiensiska canola-skörden till 3.1 mt (från 2.6 mt).

Vi fortsätter att ha en övervägande negativ vy på prisutvecklingen på raps.

[box]SEB Veckobrev Jordbruksprodukter är producerat av SEB Merchant Banking och publiceras i samarbete och med tillstånd på Råvarumarknaden.se[/box]

Disclaimer

The information in this document has been compiled by SEB Merchant Banking, a division within Skandinaviska Enskilda Banken AB (publ) (“SEB”).

Opinions contained in this report represent the bank’s present opinion only and are subject to change without notice. All information contained in this report has been compiled in good faith from sources believed to be reliable. However, no representation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents and the information is not to be relied upon as authoritative. Anyone considering taking actions based upon the content of this document is urged to base his or her investment decisions upon such investigations as he or she deems necessary. This document is being provided as information only, and no specific actions are being solicited as a result of it; to the extent permitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this document or its contents.

About SEB

SEB is a public company incorporated in Stockholm, Sweden, with limited liability. It is a participant at major Nordic and other European Regulated Markets and Multilateral Trading Facilities (as well as some non-European equivalent markets) for trading in financial instruments, such as markets operated by NASDAQ OMX, NYSE Euronext, London Stock Exchange, Deutsche Börse, Swiss Exchanges, Turquoise and Chi-X. SEB is authorized and regulated by Finansinspektionen in Sweden; it is authorized and subject to limited regulation by the Financial Services Authority for the conduct of designated investment business in the UK, and is subject to the provisions of relevant regulators in all other jurisdictions where SEB conducts operations. SEB Merchant Banking. All rights reserved.

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Analys

A recession is no match for OPEC+

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SEB - analysbrev på råvaror

History shows that OPEC cuts work wonderfully. When OPEC acts it changes the market no matter how deep the crisis. Massive 9.7 m b/d in May 2020. Large cuts in Dec 2008. And opposite: No-cuts in 2014 crashed the price. OPEC used to be slow and re-active. Now they are fast and re-active. Latest cut indicates a ”reaction-function” with a floor price of USD 70/b. Price could move lower than that in May, but JMMC meeting on 4 June and full OPEC+ meeting on 5-6 July would then change the course. Fresh cuts now in May will likely drive market into deficit, inventory draws, stronger prices. Sell-offs in May should be a good buying opportunities

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

Production cuts by OPEC+ do work. They work wonderfully. Deep cuts announced by OPEC in December 2008 made the oil price bottom at USD 33.8/b on Christmas Eve. That is USD 48.3/b adj. for CPI. The oil price then collapsed in 2014 when it became increasingly clear during the autumn that OPEC would NOT defend the oil price with confirmation of no-cuts in December that year.  The creation of OPEC+ in the autumn of 2016 then managed to drive the oil price higher despite booming US shale oil production. A massive 9.7 m b/d cut in production in May 2020 onward made the oil price shoot higher after the trough in April 2020. 

Historical sequence pattern is first a price-trough, then cuts, then rebound. This history however points to a typical sequence of events. First we have a trough in prices. Then we get cuts by OPEC(+) and then the oil price shoots back up. This probably creates an anticipation by the market of a likewise sequence this time. I.e. that the oil price first is going to head to USD 40/b, then deep cuts by OPEC+ and then the rebound. If we get an ugly recession.

But OPEC+ is faster and much more vigilant today. Historically OPEC met every half year. Assessed the situation and made cuts or no cuts in a very reactive fashion. That always gave the market a long lead-time both in terms of a financial sell-off and a potential physical deterioration before OPEC would react.

But markets are faster today as well with new information spreading to the world almost immediately. Impact of that is both financial and physical. The financial sell-off part is easy to understand. The physical part can be a bit more intricate. Fear itself of a recession can lead to a de-stocking of the oil supply chain where everyone suddenly starts to draw down their local inventories of crude and products with no wish to buy new supplies as demand and prices may be lower down the road. This can then lead to a rapid build-up of crude stocks in the hubs and create a sense of very weak physical demand for oil even if it is still steady.

Deep trough in prices is possible but would not last long. Faster markets and faster OPEC+ action means we could still have a deep trough in prices but they would not last very long. Oil inventories previously had time to build up significantly when OPEC acted slowly. When OPEC then finally made the cuts it would take some time to reverse the inventory build-up. So prices would stay lower for longer. Rapid action by OPEC+ today means that inventories won’t have time to build up to the same degree if everything goes wrong with the economy. Thus leading to much briefer sell-offs and sharper and faster re-bounds.

OPEC+ hasn’t really even started cutting yet. Yes, we have had some cuts announced with 1.5 m b/d reduction starting now in May. But this is only bringing Saudi Arabia’s oil production back to roughly its normal level around 10 m b/d following unusually high production of 11 m b/d in Sep 2022. So OPEC+ has lots of ”dry powder” for further cuts if needed.

OPEC reaction function: ”USD 70/b is the floor”. The most recent announced production cut gave a lot of information. It was announced on 2nd of April and super-fast following the 20th of March when Dated Brent traded to an intraday low of USD 69.27/b.

JMMC on 4 June and OPEC+ meeting on 5-6 July. Will cut if needed. OPEC+ will now spend the month of May to assess the effects of the newest cuts. The Joint Ministerial Monitoring Committee (JMMC) will then meet on 4 June and make a recommendation to the group. If it becomes clear at that time that further cuts are needed then we’ll likely get verbal intervention during June in the run-up to 5-6 July and then fresh cuts if needed.

Oil man Biden wants a price floor of USD 70/b as well. The US wants to rebuild its Strategic Petroleum Reserves (SPR) which now has been drawn down to about 50%. It stated in late 2022 that it wanted to buy if the oil price fell down to USD 67 – 72/b. Reason for this price level is of course that if it falls below that then US shale oil production would/could start to decline with deteriorating energy security for the US. Latest signals from the US administration is that the rebuilding of the SPR could start in Q3-23.

A note on shale oil activity vs. oil price. The US oil rig count has been falling since early December 2022 and has been doing so during a period when the Dated Brent price has been trading around USD 80/b.

IMF estimated social cost-break-even oil price for the different Middle East countries. As long as US shale oil production is not booming there should be lots of support within OPEC+ to cut production in order to maintain the oil price above USD 70/b. Thus the ”OPEC+ reaction-function” of a USD 70/b floor price. But USD 80/b would even satisfy Saudi Arabia.

IMF estimated social cost-break-even oil price for the different Middle East countries
Source: SEB graph, Bloomberg, IMF

US implied demand and products delivered is holding up nicely YoY and on par with 2019. So far at least. Seen from an aggregated level.

US implied demand and products delivered
Source: SEB graph and calculations, Blberg, US DOE

Total US crude and product stocks including SPR. Ticking lower. Could fall faster from May onward due to fresh cuts by OPEC+ of 1.5 m b/d

Total US crude and product stocks including SPR.
Source: SEB graph and calculations, Bloomberg, DOE

An oil price of USD 95/b in 2023 would place cost of oil to the global economy at 3.3% of Global GDP which is equal to the 2000 – 2019 average.

Oil cost as share of global economy
Source: SEB calculations and graph, Statista, BP
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Analys

Mixed signals on demand but world will need more oil from OPEC but the group is cutting

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SEB - analysbrev på råvaror

A world where OPEC(+) is in charge is a very different world than we are used to during the ultra-bearish 2015-19 period where US shale AND offshore non-OPEC production both were booming. Brent averaged USD 58/b nominal and USD 70/b in real terms that period. The Brent 5yr contract is trading at USD 66/b nominal or USD 58.6/b in real-terms assuming no market power to OPEC+ in 2028. Could be, but we don’t think so as US Permian shale is projected by major players to peak next 5yrs. When OPEC(+) is in charge the group will cut according to needs. For Saudi that is around USD 85/b but maybe as high as USD 97/b if budget costs rise with inflation

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

No major revisions to outlook by the IEA last week in its monthly Oil Market Report.

Total demand to rise 2 m b/d, 90% of demand growth from non-OECD and 57% from Jet fuel. Total demand to rise by 2 m b/d YoY to 101.9 m b/d where 90% of the gain is non-OECD. Jet fuel demand to account for 57% of demand growth as global aviation continues to normalize post Covid-19. Demand for 2022 revised down by 0.1 m b/d and as a result so was the 2023 outlook (to 101.9 m b/d). Non-OPEC supply for 2023 was revised up by 0.1 m b/d. Call-on-OPEC 2023 was reduced by 0.2 m b/d as a result to 29.5 m b/d. Call-on-OPEC was 28.8 m b/d in Q4-22. The group produced 28.94 m b/d in Mar (Argus).

World will need more oil from OPEC. Call-on-OPEC to rise 1.6 m b/d from Q4-22 to Q4-23. IEA is forecasting a call-on-OPEC in Q4-23 of 30.4 m b/d. The world will thus need 1.6 m b/d more oil from OPEC YoY in Q4-23 and 0.46 m b/d more than it produced in March. Counter to this though the OPEC group decided to cut production by 1 m b/d from May to the end of the year. So from May onward the group will produce around 28 m b/d while call-on-OPEC will be 29.1 m b/d, 30.3 m b/d and 30.4 m b/d in Q2,3,4-23.

If the IEA is right about demand then the coming OPEC cuts  should drive inventories significantly lower and oil prices higher.

But the market doesn’t quite seem to buy into this outlook. If it had then prices would have moved higher. Prices bumped up to USD 87.49/b intraday on 12 April but have since fallen back and Brent is falling back half a percent today to USD 85.9/b.

Market is concerned for declining OECD manufacturing PMI’s. It is of course the darkening clouds on the macro-sky which is making investors concerned about the outlook for oil products demand and thus crude oil demand. Cross-currents in global oil product demand is making the situation difficult to assess. On the one hand there are significant weakening signals in global diesel demand along with falling manufacturing PMIs. The stuff which makes the industrial world go round. Manufacturing, trucking, mining and heavy duty vehicles all need diesel. (Great Blbrg story on diesel here.) Historically recessions implies a cyclical trough in manufacturing activity, softer diesel demand and falling oil prices. So oil investors are naturally cautious about buying into the bull-story based on OPEC cuts alone.

Cross-currents is making demand growth hard to assess. But the circumstances are much more confusing this time around than in normal recession cycles because: 1) Global Jet fuel demand is reviving/recovering post Covid-19 and along with China’s recent reopening. IEA’s assessment is that 57% of global demand growth this year will be from Jet fuel. And 2) Manufacturing PMIs in China and India are rising while OECD PMIs are falling.

These cross-currents in the demand picture is what makes the current oil market so difficult to assess for everyone and why oil prices are not rallying directly to + USD 100/b. Investors are cautious. Though net-long specs have rallied 137 m b to 509 m b since the recent OPEC cuts were announced.

The world will need more oil from OPEC in 2023 but OPEC is cutting. The IEA is projecting that non-OPEC+ supply will grow by 1.9 m b/d YoY and OPEC+ will decline by 0.8 m b/d and in total that global supply will rise 1.2 m b/d in 2023. In comparison  global demand will rise by 2.0 m b/d. At the outset this is a very bullish outlook but the global macro-backdrop could of course deteriorate further thus eroding the current projected demand growth of 2 m b/d. But OPEC can cut more if needed since latest cuts have only brought Saudi Arabia’s production down to its normal level.

OPEC has good reasons to cut production if it can. IEA expects global oil demand to rise 2 m b/d YoY in 2023 and that call-on-OPEC will lift 1.6 m b/d from Q4-22 to Q4-23. I.e. the world needs more oil from OPEC in 2023. But OPEC will likely produce closer to 28 m b/d from May to Dec following latest announced production cuts

Source: SEB graph, IEA, Argus

Market has tightened with stronger backwardation and investors have increased their long positions

Source: SEB calculations and graphs. Blbrg data

Net long specs in Brent + WTI has bounced since OPEC announcement on coming cuts.

Source: SEB calculations and graph, Blbrg data

Saudi Arabia’s fiscal cost-break-even was USD 85/b in 2021 projected the IMF earlier. Don’t know when it was projected, but looks like it was before 2020 and thus before the strong rise in inflation. If we add 15% US inflation to the 2021 number we get USD 97/b. Inflation should lift budget costs in Saudi Arabia as it is largely a USD based economy. Though Saudi Arabia’s inflation since Q4-19 is reported as 8% to data while Saudi cost-of-living-index is up by 11%. Good reason for Saudi Arabia to cut if it can cut without loosing market share to US shale.

Source: SEB graph, IMF data

Adjusting for inflation both on a backward and forward basis. The 5yr Brent price is today at USD 66.3/b but if we adjust for US 5yr inflation it is USD 58.6/b in real terms. That is basically equal to the average Brent spot price from 2015-2019 which was very bearish with booming shale and booming offshore non-OPEC. Market is basically currently pricing that Brent oil market in 5yrs time will be just as bearish as the ultra-bearish period from 2015-2019. It won’t take a lot to beat that when it comes to actual delivery in 2028.

Source: SEB calculations and graph, Blbrg data

Nominal Brent oil prices and 5yr Brent adj. for 5yr forward inflation expectations only

Source: SEB claculations and graph, Blbrg data

ARA Diesel cracks to Brent were exceptionally low in 2020/21 and exceptionally high in 2022. Now they are normalizing. Large additions to refining capacity through 2023 will increase competition in refining and reduce margins. Cuts by OPEC+ will at the same time make crude oil expensive. But diesel cracks are still significantly higher than normal. So more downside before back to normal is achieved.

Source: SEB graph and calculations. Blbrg data
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Analys

How renewable fuels are accelerating the decarbonisation of transport

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WisdomTree

On 16 November 2022, UK’s Royal Air Force (RAF) Voyager aircraft, the military variant of the Airbus A330, took to the skies for 90 minutes over Oxfordshire. What looked like a routine test flight in its outward appearance was ultimately deemed ground-breaking. Why? It was a world-first military transporter aircraft flight, and the first of any aircraft type in the UK to be completed using 100% sustainable jet fuel.  

Mobeen Tahir, Director, Macroeconomic Research & Tactical Solutions, WisdomTree
Mobeen Tahir, Director, Macroeconomic Research & Tactical Solutions, WisdomTree

What are renewable fuels?

Renewable hydrocarbon biofuels (also called green or drop-in biofuels) are fuels produced from biomass sources through a variety of biological, thermal, and chemical processes. These products are chemically identical to petroleum gasoline, diesel, or jet fuel.

In other words, renewable fuels are sources of energy chemically identical to fossil fuels but produced from domestic, commercial, or agricultural waste (see Figure 1 below).

Figure 1: Converting waste into energy

Waste types and refinery output

Why the excitement?

Renewable fuels, like renewable diesel and sustainable jet fuel, can reduce greenhouse gas emissions by around 80-90% compared to fossil fuels. And because they burn much cleaner, engine filters remain cleaner for longer reducing the need for maintenance. Furthermore, given used cooking oil, vegetable oil, processing waste, and animal fat waste are used as inputs, the production of these fuels reduces biowaste, thereby cutting emissions from landfills.

This makes renewable fuels a key component of the circular economy. Humans have largely operated on the linear model historically when it comes to utilising natural resources. The circular model, in contrast, is much less wasteful and seeks to recycle as much as possible (see Figure 2 below).

Figure 2: The Circular Economy

Circular economy
Source: WisdomTree, Ellen MacArthur Foundation, 2023

The most exciting thing about renewable fuels is the immediacy with which they can make an impact. The reason why they are referred to as drop-in fuels is that they can replace fossil fuels in internal combustion engines with little or no modification required. So, if supply was abundant enough, forms of transport which cannot be electrified easily like heavy duty trucks, ships, and aeroplanes can be switched across to renewable fuels making a significant improvement to the environmental footprint. According to BP, “A return flight between London and San Francisco has a carbon footprint per economy ticket of nearly 1 tonne of CO2 equivalent. With the aviation industry expected to double to over 8 billion passengers by 2050, it is essential that we act to reduce aviation’s carbon emissions.”

The challenge

Renewable fuels or biofuels are still in their infancy. This means the obvious hurdle to overcome is cost competitiveness with fossil fuels. Cost estimates vary, but figures from the International Air Transport Association (IATA) provide a useful sense for the ballpark. In May 2022, IATA stated that the average worldwide price of jet fuel is about $4.15 per gallon compared to the US average price of a gallon of sustainable aviation fuel, which is about $8.67.

So, roughly double the price of the incumbent polluting technology. This is not a bad starting point at all. Considering how rapidly the cost of energy storage in batteries has fallen in the last decade, renewable fuels could become competitive quite soon if sufficient investment is made and economies of scale are achieved. IATA also predicts that renewable fuels could make up 2% of all aviation fuels by 2025, which could become a tipping point in their competitiveness.

Businesses are acting

Businesses pursuing their own net zero targets have already started exploring renewable fuels to minimise their waste. Darling Ingredients Inc, which produces its trademark Diamond Green Diesel from recycled animal fats, inedible corn oil, and used cooking oil, was chosen by fast food chain Chick-fil-A in March 2022 to turn its used cooking oil into clean transportation fuel.

Similarly, McDonald’s entered into a partnership with Neste Corporation in 2020 to convert its used vegetable oil into renewable diesel and fuel the trucks that make deliveries to its restaurants. According to TortoiseEcofin, both Darling Ingredients and Neste have a net negative carbon footprint given emissions produced by these businesses are lower that the emissions avoided because of their renewable fuels.

A final word

Renewable fuels alone will not tackle climate change. No single solution can. But they can help us make meaningful progress. The Intergovernmental Panel on Climate Change (IPCC) emphasises how crucial it is for the world to halve its greenhouse gas emissions this decade to at least have a chance of limiting global warming to 1.5oC. This means that solutions with an immediate effect have an important role to play. Biofuels can cut emissions from waste in landfills and provide much cleaner alternatives to fossil fuels to help accelerate the world’s decarbonisation efforts. They don’t require different engines to be of use. They just need funding to reach scale.

Mobeen Tahir, Director, Macroeconomic Research & Tactical Solutions, WisdomTree

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