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SHB Råvarubrevet 6 september 2013

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Handelsbanken - Råvarubrevet - Nyhetsbrev om råvaror

Handelsbanken - Råvarubrevet inklusive ädelmetallerRåvaror allmänt

Man petar inte på en skallerom

Risktillgångar har drabbats av viss tillbakagång under veckan när en amerikansk attack mot Syrien har blivit allt mer uppenbar. Vi gästades av FOI:s analytiker som menar att sannolikheten för en attack från Obama nu är mer än 80 %. Antingen dödar man en skallerorm eller så låter man den vara i fred; man petar inte på den. Har Obama gett sig in i argumentationen med Syrien så kommer han sannolikt att löpa hela linan ut. Den geopolitiska spänningen ökar riskpremien i olja men verkar dämpande på de flesta andra råvaror.

Globalt fortsätter makrodata att vittna om en förbättring. Veckan startade med ett bättre än väntat inköpschefsindex från Kina och slutar med bra inköpschefsindex (PMI) och arbetsmarknadsdata (jobless claims) från USA. Vårt tema med en marknad som drivs av robust makrodata håller alltså i sig, och vi tror att det fortgår några månader till. Mycket av den bra makrodatan verkar dock redan vara inprisad i många tillgångslag givet hur börsen och räntemarknaden betett sig senaste tiden. Stundande oro för råvarumarknaden är Fed:s ”tapering” som väntas tillkännages under septembermötet den 18/9. Mycket av detta torde dock vara inprisat i dagens marknad och vi fortsätter därför tro att stark makrodata får råvarorna att stiga framöver.

Handelsbankens råvaruindex (USD)

Basmetaller

Kina överraskar positivt

I söndags publicerades Kinas PMI med positivt resultat, 51 mot väntade 50,6, och gav basmetallerna skjuts uppåt initialt. Efter att en attack mot Syrien blir mer sannolik har dock risktillgångar som basmetaller fallit tillbaka något under veckan. Tenn har haft ett kraftigt uppsving under veckan efter exportbegränsningar från Indonesien, värdens störta exportör. Indonesien har i sin ambition att öka de inhemska smältlönerna stoppat exporten av tenn. Dels höjer man den för export godkända halten samtidigt som man försöker stimulera den lokala handeln och landets möjligheter att behålla ett större värde av landets värdefulla naturtillgångar. Detta har tvingat PT Timah, världens tredje största producent, att åberopa force majeure sedan den 30 augusti. Låga lager och inställda leveranser från Indonesien har skickat upp priset på tenn till fem månaders högsta och har under veckan stigit med dryga 6,2 %.

Under första halvan av året har utvecklingen på basmetaller och aktiemarknaden gått ordentligt isär, bilden nedan visar utvecklingen på Handelsbankens Basmetallindex mot S&P 500 sedan 2007. Även om amerikansk och europeisk makro signalerat återhämtning under en tid, verkar den kinesiska ekonomin varit i kontraktion fram till juli/augusti i år vilket pressat efterfrågan och priserna på metaller. De senaste veckorna har vi dock sett tecken på att den kinesiska tillväxten kan ta fart igen där några fundamentala rörelser är intressanta att notera, framför allt på koppar. Kinas kopparimport har återigen ökat och såväl inhemska som globala lager har minskat samtidigt som investerare täckt sina korta positioner. När den värsta oron för ett överutbud nu avtagit samtidigt som lagren minskar anser vi att metallpriserna bör ha bottnat ur under Q2 2013 och att en ökande efterfrågan bör resultera i högre metallpriser överlag under hösten.

Handelsbankens basmetallindex mot S&P 500

Kinas kopparimport har återigen ökat och såväl inhemska som globala lager har minskat samtidigt som investerare täckt sina korta positioner. Vi tror på: LONG KOPPAR

Ädelmetaller

På guldfronten intet nytt!

Efter dagens rykande färska arbetslöshetsstatistik från USA, nonfarm payrolls som kom in något sämre än väntat, handlar guldet på 1390 dollar per uns, att jämföra med förra fredagens 1390 dollar per uns… Veckan har präglats av små rörselser i brist på nya nyheter i Syrienfrågan och i linje med en avvaktande hållning på de flesta marknaderna. Vi bibehåller vår positiva syn på guldet i det kortare perspektivet, och vår negativa syn i det längre perspektivet. Platina har tappat marginellt under veckan som gått.

Guld- och platina-priser på Comex

I ett läge där råvaror generellt har viktats ned av institutionella placerare kan guld och silver få en ”omotiverad” uppgång när dessa indexköpare återvänder till råvaror drivit av bättre utsikter för Kina och USA. Vi tror på: LONG GULD H och LONG SILVER H

Energi

Fortsatt Syrienattack i fokus

Oljan ligger kvar på höga nivåer där oron för utbudsstörningar i Mellanöstern och sannolikheten att att USA slår tillbaka på al-Assad regimen kvarstår. Buy the rumour sell the fact brukar ju vara en gyllene regel där vi tidigare sett riskpremien pysa ut ganska hastigt efter både Libyen- och Irankonflikten. Även om så sker efter en eventuell intervention, ser vi flera faktorer som kan skrämma upp oljepriset ytterligare. Den globala reservkapaciteten är endast 1.3 miljoner fat per dag och vi ställer oss frågande till om Saudiarabien, som redan idag producerar på rekordnivå, verkligen kan täcka upp för det kraftiga produktionsbortfallet från Nigeria, Libyen och Iran (se bilden nedan). Även Irak har minskat sin produktion de senaste 12 månaderna och denna osäkerhet anser vi väl motiverar nuvarande riskpremie. Lägg därtill positiv amerikansk makrostatistik vilket i kombination med vikande råoljelager för nionde veckan i rad bör skapa en hel del rörelser på uppsidan. Vår rekommendation om lång position kvartsår.

Elmarknaden och kvartalet Q1 2014 (som nu är underliggande för Handelsbankens elindex och investeringsprodukter) stiger med närmare 6 procent denna vecka. Uppgången inleddes med att Oskarshamnsverket 3 oväntat föll ur drift förra helgen vilket resulterade i att svenska kärnkraften föll tillbaka på 58 procents output. Det torra scenario vi såg mot slutet av förra veckan låg kvar över helgen vilket genererade en hel del köpintresse. Vidare har såväl bränslekomplex, utsläppsrätter och Tyska marknaden där vi sett en del shortcovering stärkts vilket gjort att vi tagit oss igenom tidigare motståndsnivåer. Vädret spelar till stor del in och begränsar nedsidan på de två kommande kvartalskontrakten. Senaste väderprognoserna pekar på ett kraftigt underskott i nederbörden de kommande 10-dagarna vilket i skrivande stund ser ut att försämra energibalansen med 5-6 TWh ned till -13 TWh. Vi ligger därför kvar med lång rekommendation.

Diagram över oljeproduktion

Oroligheterna i mellanöstern med risk för ytterligare produktionsbortfall ger stöd till oljepriset. Vi tror på: LONG OLJA

Livsmedel

Goda skördar pressar rispriset

Spannmålspriserna har den senaste tiden påverkats i hög grad av väderutvecklingen i USA. Majsen, men främst sojan som inte kommit lika långt i sin utveckling, har påverkats negativt av torrt och varmt väder och risken för nedjusteringar av kommande skörd har ökat. Väderprognoserna har varierat en del och priserna likaså – regn i sikte har pressat ned prisnivån något men nya prognoser om åter minskad nederbörd har lätt skapat ett uppsving igen.

Kakao tillhör den råvara i vårt livsmedelindex som gått bäst sedan årsskiftet. SHB Cocoa har gått upp drygt 8,5 procent som följd av bl.a. torrt väder och minskad skörd i Afrikas västkust. Under veckan har kakaopriset fått ytterligare stöd och nådde 11-månaders högsta efter nya väderrapporter som visat på halverat skyfall för de senaste 30 dagarna jämfört med ett normalår.

En annan mjuk råvara som haft ett volatilt år är ris. Underliggande terminen till SHB Rice är Rough Rice som handlas på Chicago börsen och där ett kontrakt motsvarar 2000 CWT (ca 90 kg). De globala lagren på ris väntas stiga till 107,47 miljoner ton för säsong 2013-14 – vilket är i så fall den högsta siffran på 12 år. Förväntningarna på den kommande globala risproduktionen för säsong 2013-14 visar på en ökning med 1,9 procent från tidigare säsong, enligt den senaste rapporten från amerikanska jordbruksdepartementet. Förhållandet mellan utgående lager i förhållande till årlig konsumtion är 22,6 procent. Den höga siffran visar på välfyllda rislager för säsongen varför vi tror på fallande priser.

Utveckling på rispriset, CBOT

Förväntningar på den kommande risproduktionen är stor och prognoser visar på välfyllda lager. Vi tror på: SHORT RIS

Handelsbankens Råvaruindex

Handelsbankens råvaruindex 6 september 2013

Handelsbankens råvaruindex består av de underliggande indexen för respektive råvara. Vikterna är bestämda till hälften från värdet av nordisk produktion (globala produktionen för sektorindex) och till hälften från likviditeten i terminskontrakten.

[box]SHB Råvarubrevet är producerat av Handelsbanken och publiceras i samarbete och med tillstånd på Råvarumarknaden.se[/box]

Ansvarsbegränsning

Detta material är producerat av Svenska Handelsbanken AB (publ) i fortsättningen kallad Handelsbanken. De som arbetar med innehållet är inte analytiker och materialet är inte oberoende investeringsanalys. Innehållet är uteslutande avsett för kunder i Sverige. Syftet är att ge en allmän information till Handelsbankens kunder och utgör inte ett personligt investeringsråd eller en personlig rekommendation. Informationen ska inte ensamt utgöra underlag för investeringsbeslut. Kunder bör inhämta råd från sina rådgivare och basera sina investeringsbeslut utifrån egen erfarenhet.

Informationen i materialet kan ändras och också avvika från de åsikter som uttrycks i oberoende investeringsanalyser från Handelsbanken. Informationen grundar sig på allmänt tillgänglig information och är hämtad från källor som bedöms som tillförlitliga, men riktigheten kan inte garanteras och informationen kan vara ofullständig eller nedkortad. Ingen del av förslaget får reproduceras eller distribueras till någon annan person utan att Handelsbanken dessförinnan lämnat sitt skriftliga medgivande. Handelsbanken ansvarar inte för att materialet används på ett sätt som strider mot förbudet mot vidarebefordran eller offentliggörs i strid med bankens regler.

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1 kommentar

1 kommentar

  1. Magnus

    8 september, 2013 vid 17:30

    Känns som att alla analytiker tror på stigande elpris. Bull El är det som gäller!

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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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