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Week Commencing August 18, 2014

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This week we look at the following topics:•Will alternate energy overtake the demand for oil?•Renewable energy sources vs oil & natural gas•Biofuel, hydroelectric & nuclear energy

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Last week we spoke about the geopolitical unrest in the Middle East and the key trigger points which could lead to higher oil prices. The spread of militant group ISIS (The Islamic State of Iraq and Syria) has seen mass displacement of minority groups in Iraq. France called for an emergence United Nations Security Council meeting to address the growing humanitarian crisis.

We said that Saudi Arabia, Kuwait and the other Persian Gulf states were all highly sensitive to the spread of militant groups like ISIS and the impending implications that this could have on oil prices.

If you didn’t read last week’s report, we encourage you to go back and spend a few minutes going through and checking to see our thoughts and convictions. The direct link is here.

Our focus this week is on alternative sources of energy. There is a lot of noise out there in the market that emerging alternative sources of energy are enough of a threat to put downward pressure on oil prices in the short term. We believe this is completely false and we will show this through statistics this week. Alternative sources of energy are important in the future management of global resources and sustainability but they are still not at a level adequate enough to completely compensate or even threaten the demand for conventional sources of energy – particularly as the developing world starts to increase its per capita consumption of oil, gas and coal.

It’s not that we don’t believe in alternative and renewable energy sources, it’s just that the technology at the moment is not economic enough to justify downward pressure on conventional sources of energy, particularly oil which has been the major focus on this month’s reports.

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Renewable energy sources – in power generation as well as transport – continued to increase in 2013, reaching a record 2.7% of global energy consumption, up from 0.8% a decade ago. Renewable energy used in power generation grew by 16.3% and accounted for a record 5.3% of global power generation. China recorded the largest incremental growth in renewables, followed by the US, while growth in Europe’s leading players – Germany, Spain and Italy – was below average. Globally, wind energy (+20.7%) once again accounted for more than half of renewable power generation growth and solar power generation grew even more rapidly (+33%), but from a smaller base. The numbers on other renewable forms of energy though were not that great!

Image: Global biofuels production via BP statistics showing below average growth in 2013

Global biofuel production grew by a below-average 6.1% (80,000 b/doe), driven by increases in the two largest producers: Brazil (+16.8%) and the US (+4.6%). As global food prices increase, driven by an emerging middle class in China and India numbering almost two billion people, demand for agricultural commodities including those used to produce bio-fuels will add to upward pressure. Hydoelectrical power is also complicated by the availability of water, rising sea temperatures (depending on where you stand on the whole global warming hypothesis) and other demographic shifts which impact the implementation of dams and reservoirs.

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Global hydroelectric output grew by a below average 2.9% in 2013 according to BP’s annual statistical review. Led by China and India, the Asia-Pacific region accounted for 78% of global growth. Drought conditions reduced output in Brazil by 7% and in Finland, Norway and Sweden by a combined 14.5%. Hydroelectric output accounted for 6.7% of global energy consumption.

Image: Rate of global Biofuel production over the past decade via BP

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The biggest story for us in the alternative energy space is the slowdown in nuclear power production. Global nuclear power output grew by only 0.9% in 2013 and this was the first increase since 2010.

There is no doubt the Fukushima disaster has caused many countries to re-evaluate their nuclear programs due to political and social unease. Increases in production were driven by the US, China and Canada but offset by declines in South Korea, Ukraine, Spain and Russia. Japanese output fell by 18.6% and has fallen by 95% since 2010. Nuclear output accounting for 4.4% of global energy consumption, the smallest share since 1984!

The table below is an excellent example of the proportion of consumption from all sources of revenue for all the major energy consuming regions. Our point here is to illustrate where the most statistically significant consumption of energy occurs and who is consuming it. Renewable energy sources and alternatives are growing, but when compared to the level of consumption in oil and natural gas, they are quiet insignificant to the overall pie.

Table: Consumption of energy by million tonne of oil equivalents, globally via BP

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In a nutshell, the world consumed around 15x more oil than it did renewable sources of energy in 2013 compared to 17x in 2012. The shift down from 17x to 15x is a significant improvement BUT is still very large to the overall pie. To put this into perspective, renewable, hydro and nuclear energy all combined represented just 13% of total global energy consumption in 2013. In comparison, oil alone represented around 33%. Alternative sources of energy are emerging but they are still nowhere near large enough to offset any supply fears which might emerging.

What happens in oil markets is crucial. Over the past three weeks we have shown through statistics and analysis the following points:

Energy production in the United States is growing but the reliance on oil is still very high and US oil production would have to double in order for the US to become completely self-sufficient.The fastest growing countries – non-OECD nations – are hungry for oil as their per capita consumption rises towards those of the developed world.The situation in Iraq is a serious geopolitical development because it has the impact of spreading to the most significant oil production region in the world including Saudi Arabia, Kuwait, Iran and the UAE.Renewable sources of energy are growing but not at a pace enough to completely offset the looming demand for conventional sources of energy like oil and coal.Nuclear power output has almost now growth now that Japan has massively reduced its reliance on this type of energy source and other countries are likely to face similar political and social pressure, adding more pressure on coal, gas and oil energy sources.

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Next week we will discuss the best way to trade the current pullback in the energy market via Invast’s MT4 platform – both oil contracts and natural gas. Natural Gas has seen a pullback also in the past couple of weeks, below is an hourly chart of Natural Gas via Invast MT4 platform with the ticker code NGQ4. To find out more about the full commodity product specifications, please visit http://www.invast.com.au/markets/commodities.

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We’ll talk more about the dynamics in the natural gas market next week. In terms of the statistics, global natural gas consumption grew by 1.4%, below the historical average of 2.6%. As was the case for primary energy, consumption growth was above average in the OECD countries (+1.8%) and below average outside the OECD (+1.1%). Growth was below average in every region except North America. China (+10.8%) and the US (+2.4%) recorded the largest growth increments in the world, together accounting for 81% of global growth. India (-12.2%) recorded the largest volumetric decline in the world, while EU gas consumption fell to the lowest level since 1999. Globally, natural gas accounted for 23.7% of primary energy consumption. Global natural gas production grew by 1.1%, which was well below the 10-year average of 2.5%. Growth was below average in all regions except Europe and Eurasia. The US (+1.3%) remained the world’s leading producer, but both Russia (+2.4%) and China (+9.5%) recorded larger growth increments in 2013. Nigeria (-16.4%), India (-16.3%), and Norway (-5%) recorded the largest volumetric declines.

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Energy outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise the August outlook guide for energy markets in this exclusive webinar. Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

True or False? What’s happening in the USA energy marketHow the impact of the Middle East problems will impact oil supplyAlternative energy options, what are theyHow to trade the energy markets on Invast MT4 platform

Peter’s webinar will cover both the fundamental and technical outlook going forward plus the key drivers to look out for and is expected to fill fast. Q&A will be open straight after the webinar. Register now by visiting CLICKING HERE.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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