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Analys

SIP Nordic – Råvaruguiden – juni 2012

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SIP Nordic - RåvaruguidenRåvaror och Grexit

Det spekuleras vilt i medierna om ett potentiellt Grekiskt utträde ur EU, även kallat Grexit. Det debatteras fram och tillbaka om hur troligt detta scenario är. Frågan jag ställer mig är hur detta kommer påverka råvaror och i synnerhet ädelmetallen guld.

De senaste veckorna har debatten kring den grekiska krisen eskalerat igen. Valet för några veckor sedan, där politikerna misslyckades att sätta ihop en regering, ökade oroligheten för att Grekland inte kommer att kunna fullfölja de budgetåtaganden som den förra regeringen klubbat igenom. Nyvalet i mitten av juni kommer att vara mycket viktigt, inte enbart för den europeiska ekonomin utan också för den framtida utvecklingen för råvaror.

Grexit - Grekland lämnar euron?Man kan lugnt säga att ECB har en tuff sommar framför sig med en potentiell Grexit men också sämre utsikter för bland annat Spanien och Italien.

‘Att ECB måste trycka nya pengar är nog inte en dålig gissning, något som kommer att kunna straffa euron och som i sin tur kommer att påverka råvarorna.

En svagare euro kontra dollarna har historiskt sett en negativ påverkan på bland annat ädelmetallerna guld och silver. Många kommer säkert ihåg förra årets skriverier om USAs dåliga ekonomi som fick dollarna att falla och guldet att klättra upp till nivåer kring 1900$/oz. Nu ser vi det omvända.

Den europeiska krisen har till och med fått de allra mest pessimistiska att tro på en EUR/USD kurs kring 1.00 (nu kring 1.25). Det är alltså ingen dålig gissning att guld kan falla om EUR/USD också faller. Som bilden nedan visar har Guld haft en stark koppling till EUR/USD den senaste tiden.

Diagram över valutorna Euro/USD vs guld

Detta grundar sig i att om dollarn blir starkare jämfört med andra valutor blir guld dyrt att investera i för utländska investerare. Självklart är det så att är många fler faktorer än dollarkursen som styr guldpriset men jag kommer i alla fall hålla koll på kursen den närmaste tiden.

Råvaror – Energi

Brent olja

Brent - Oljeprisets utveckling - November 2010 till maj 2012

  • Brentoljan är nu för första gången i år nere på negativa siffror. Drygt 3% ned för året.
  • Under maj månad har Brent-oljan tappat nästan 13%.
  • En viktig faktor är den stärkta dollarn kontra andra valutor vilket pressar priset på oljan.
  • Rekordhöga lagernivåer driver ned priset. Oroligheterna i mellanöstern som drev upp oljepriset i början av året verkar nu vara utraderade.
  • Säljare av olja blir fler och fler vilket i kombination av en stärkt dollar och höga lagernivåer kan tala för ett fortsatt fall i oljepriset. $100 är en viktig nivå.

Framtida oljepris - Brent

Naturgas

Prisutveckling på naturas från november 2010 till maj 2012

  • Naturgas fortsätter att stiga. Under maj månad har naturgas stigit ytterligare 5%.
  • Under april-maj har priset på naturgas ökat med nästan 14%.
  • För året är dock naturgas ned drygt 20%.
  • Lagren av naturgas väntas öka under 2012 med 26 %.
  • Trots stora naturgaslager ökar priset på naturgas vilket dels kan förklaras av att temperaturen i USA spås ligga under det normala i juni och juli.

Framtida naturgaspris - Prognoser sammanställda av Bloomberg

Råvaror – Metaller

Guld

Prisutveckling på guld från november 2010 till maj 2012.

  • Guld fortsätter att tappa under maj. Under maj månad är guld ned ca. 6%.
  • Sedan i slutet av februari har guld tappat drygt 12% och ligger nu +-0 för året.
  • Reuters publicerade i april sin guldundersökning. Där förutspås en guldkurs som fluktuerar i ett stort spann men som ligger något över dagens nivåer vid årets slut.
  • En starkare dollar kontra andra valutor, med euron i spetsen, bidrar till kräftgången i guldpriset.
  • Olika centralbanker med Mexiko, Ryssland och Sydkorea i spetsen köpte under 2011/2012 455 ton guld. Det största inköpet sedan 1964.

Framtida guldpris - Prognos den maj 2012

Silver

Silverpriset, utveckling sedan november 2010

  • Silvers kraftiga uppgång under jan-feb raderades under maj månad.
  • Efter en nedgång på över 10% i maj är nu silver +-0 för året.
  • Silverproduktionen väntas öka 4% under 2012.
  • Överskottet av silver väntas i slutet av 2012 bli smått otroliga 5060 ton.
  • Den europiska kreditkrisen i kombination med rädsla för minskad kinesisk tillväxt bidrar till de negativa sentimenten i silver.
  • Att dollarn stärkts mot euron bidrar även till den fallande trenden.

Framtida silverpris - Analytiker i maj 2012

Platina

Utveckling för pris på platina - 2010 till 2012

  • Likt de andra ädelmetallerna är platina ned under maj månad. Nedgången stannade vid knappa 11%.
  • För året är platina upp knappa 2%.
  • Platina fortsätter at handlas till en billigare kurs än guld. Analytikerna spår dock att platina kommer vara den dyrare av de två vid slutet av året.
  • Den starka dollarn sätter även här käpparna i hjulet på platinapriset.
  • Efter strejken vid Rustenburggruvan i Sydafrika ökar nu lagren av platina samtidigt som efterfrågan minskar.

Framtida pris på platina

Koppar

Kopparpriset - Utveckling 2010 - 2012

  • Kan tyckas tjatigt men även koppar tappade under maj månad. Nedgången med nästan 14% raderar ut hela årets uppgång.
  • Kopparinventarierna ligger på låga nivåer och lagren av koppar räcker endast i tre veckor.
  • Samma siffra väntas sjunka till 2.8 under 2013 vilket kan trycka upp kopparpriset ytterligare.
  • Den största risken ligger i att Kina, med 40% av världskonsumtionen, står inför en minskande tillväxt.

Framtida kopparpris - Prognoser från analytiker

Zink

Utveckling på zinkpriset 2010 - 2012

  • Den tunga månaden för metaller gäller även för zink. Zink är under maj månad ned ca. 8%. För året är zink upp drygt 3,5%.
  • Zinklagrena är mer än fulla vilket kan komma att pressa priset ytterligare.
  • Kina är återigen en viktig bricka i spelet. En minskad tillväxt i Kina kommer troligtvis ha en betydande effekt på zinkpriset. Kina står för 43% av världens konsumtion.
  • Det uppskattas att nuvarande zinktillgång skulle räcka 9,1 veckor, 2,6 veckor längre än 2011.

Framtida zinkpris - Prognoser

Nickel

Nickelprisets utveckling år 2010 till 2012

  • Nickel presterade sämst av alla basmetaller under 2011.
  • Nickel fortsätter sin kräftgång under 2012. I maj backade nickel över 8% och är för året ned nästan 9%.
  • Nickelmarknaden är mättad med ökande lager.
  • Produktionen väntas överstiga konsumtionen under 2012. Mängden tillgänglig nickel väntas dock minska under 2013 och i kombination med ett bättre marknadsläge spår analytikerna ett högre nickelpris under 2013.
  • Nuvarande nickelnivåer räcker för 9,1 veckors konsumtion. Ca en vecka högre än 2011.

Framtida nickelpris - Konsensusprognoser

Råvaror – Jordbruk

Socker

Utveckling på sockerpriset under 1,5 år

  • Socker startade året starkt, till följd av dåliga och torra väderförhållandena i världens största sockerproducerande land, Brasilien.
  • Sedan mars faller dock socker kraftigt. Indien producerar och exporterar socker i hög fart vilket resulterat i att socker under mars-maj tappat nästan 24%.
  • I Indien, som öppnat för obegränsad export, spås rekordskördar.
  • Genomsnittspositionen är fortsatt lång men säljarna börjar nu bli fler och fler.

Framtida sockerpriser - Konsensusprognoser

Bomull

Prisutveckling på bomull - Diagram över 2010 till 2012

  • Bomull är för året ned ca 26% där merparten av nedgången kom i maj. I maj föll bomullspriset med närmare 20%.
  • Rekordexport av bomull från Indien pressar priset.
  • Trots att bomullspriset fallit kraftigt under 2012 är det fortfarande nästan dubbelt så högt som priset för några år sedan. Fallhöjden är således stor.

Prognoser - Framtida pris på bomull

Majs

Diagram - Prisutveckling på majs 2010 - 2012

  • Majspriset är under maj månad ned över 14% vilket också motsvarar årsnedgpngen i majs.
  • Den kommande skörden vänats vara av mycket god kvalitet.
  • För att den negativa trenden i majs ska brytas krävs fortsatt torka i USA. Regnväder är dock att vänta under sommamånaderna.
  • Statistik som visar USA-exporten av majs ökar kraftigt. Kina importerar nu rekordstora mängder majs.

Prognoser på framtida majspris - Maj 2012

Vete

Prisutveckling på vete - 2010 - 2012

  • Vetepriset är under maj månad upp nästan 7% till följd av torra väderförhållanden i USA, Kina och Europa.
  • För året är dock vete ned dryga 1%.
  • Spekulanterna har under maj månad skiftat tro. Antalet korta positioner har minskat kraftigt.

Framtida pris på vete - Maj 2012

Apelsinjuice

  • Priset på apelsinjuice fortsätter att falla som en sten. Under maj månad är priset apelsinjuice ned 26%.
  • Det finns fortfarande fallhöjd i kursen då apelsinjuice har stigit med nästan 70 % sedan 2009.
  • Skörden I Florida är mycket god till följd av frostfria väderförhållanden. Samtidigt visar rapporter att efterfrågan på apelsinjuice minskar vilken kyler av priset.

Prisutveckling på apelsinjuice (FCOJ)

[box]Denna uppdatering är producerat av SIP Nordic och publiceras i samarbete och med tillstånd på Råvarumarknaden.se[/box]

Ansvarsbegränsning

Detta produktblad utgör endast marknadsföring och har sammanställts av SIP Nordic Fondkommission AB.

Innehållet ger inte fullständig information avseende det finansiella instrumentet. Investerare uppmanas att del av prospekt och slutliga villkor, vilka finns tillgängliga på: www.rbsbank.se/markets, innan ett investeringsbeslut tas.

Förekommande exempel är simulerade och baseras på SIP Nordics egna beräkningar och antaganden, en person som använder andra data eller antaganden kan nå andra resultat. Administrativa avgifter och transaktionsavgifter påverkar den faktiska avkastningen.

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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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