By Noah Browning, Bozorgmehr Sharafedin

LONDON, (Reuters) – The coal market has outpaced pre-COVID-19 levels. Oil is not far behind. This sets back the hopes of a rapid transition to renewable energy sources from fossil fuels.

The global shortage of natural gas, record coal and gas prices, the power crisis in China, and three year high oil prices tell one story: energy demand has rebounded, but fossil fuels are still needed to supply most of that energy.

    “The demand fall during the pandemic was entirely linked to governments’ decision to restrict movements and had nothing to do with the energy transition,” Cuneyt Kazokoglu, head of oil demand analysis at FGE told Reuters.

    “The energy transition and decarbonisation are decade-long strategies and do not happen overnight.”

    Over three-quarters of global energy demand is still met by fossil fuels with less than a fifth by non-nuclear renewables, according to energy watchdog the International Energy Agency.

   Energy transition policies have come under fire for the run up in energy prices. They are making an impact in some areas, like Europe, where the high carbon price aimed at reducing greenhouse gas emissions has made it difficult for utilities to turn off coal-fired power plants in order to reduce the shortfall.

China’s policies to cut emissions contributed to its decision to restrict energy supply to heavy industries.

   But much of the rise in energy prices is simply because producers took enormous amounts of capacity offline last year when the pandemic led to an unprecedented fall in demand.

RENEWABLES IS NOT A CAUSE, BUT A SOLUTION

The economic recovery has been a boon for producers of oil, gas and coal. Much of this was triggered by stimulus spending by governments in energy-intensive sectors.

Power supply issues have been influenced by the national policy. China has imposed power price rules that make it impossible for utilities to afford coal to generate power and then sell it. The cost of coal in China is so high that they cannot profit from the sale.

Chinese utilities produce below their capacity in order to not lose money but because they can’t produce enough.

However, gas projects can take several years to plan and construct so this shortage is due to investment decisions that were made pre-pandemic, and before energy transition gained political momentum.

    The chief of the Paris-based IEA said energy transition policies were not to blame for the crisis.

    “Well-managed clean energy transitions are a solution to the issues that we are seeing in gas and electricity markets today – not the cause of them,” Fatih Birol said in a statement.

2020 LOSSES Erased

    Still, the IEA’s data show global demand for coal, the single largest source of CO2 emissions, surpassed pre-pandemic levels late last year.

The global shortage of coal is due to tight supplies because China (which accounts for half the world’s output) has increased safety standards at its mines following a series of incidents that have sapping production.

This has led to China import more coal from Indonesia and less for India.

    Global coal demand is set for with a 4.5% increase this year, pushing beyond 2019 levels.

Click here for a graphic about IEA’s coal consumption

https://fingfx.thomsonreuters.com/gfx/mkt/klvykgorxvg/coalconsumptiona.png

Global natural gas consumption fell by 1.9 per cent last year. It was a lower drop than any other energy source, as utilities increased power production in winter to heat homes.

The IEA predicts that gas demand in 2021 will increase by 3.2% to more than 4 trillion cubic meters. This would erase 2020’s losses and push demand higher than 2019 levels.

A graphic showing Rystad LNG consumption is available here:

https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrdnbgvm/LNGdemand.PNG

McKinsey has a great graphic for Natural gas.

https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwkebyvo/mckinze.PNG

Rystad Energie, an Oslo-based consultancy, said that cold weather conditions in the north hemisphere have “caused a rise of demand for coal and liquefied petroleum gas (LNG), electricity, and even a little bit oil (that’s) here to stay”.

While LNG is only 10% of total global supply, the commodity can be traded more widely globally to make it more accessible so that short-term supplies can be met.

    “Eye-popping price spikes and their spread between summer and winter will widen, especially for gas, both natural and liquefied,” Rystad added, as prices are higher amid cold winter weather than in summer.

SUPPLY GAPS, SHORT TERM RALLIES

    Last to catch up, oil demand is set to rebound toward pre-pandemic levels above 100 million barrels per day sometime next year, according to four of the major tracking groups.

The reason for high oil prices is that OPEC (and allied producers) still produce millions of barrels of oil per day after making record-breaking cuts during the pandemic in order to meet plummeting transport fuel demand.

    Producer club OPEC offers the most robust prediction for a demand rebound, putting the recovery date at the second quarter of 2022.

Here’s a graph showing the recovery timeline for world oil demand from pandemic.

https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoddrwpx/Pasted%20image%201631622128583.png

Click here for a graphic about FGE Oil Demand

https://fingfx.thomsonreuters.com/gfx/mkt/mopankzrqva/FGEoildemand.PNG

A larger supply gap may lead to price shocks in the future. With many forecasters predicting a peak for fossil fuel demand over the next 20 years and the IEA recommending against projects to achieve net zero emissions, the longer-term future could be even more uncertain.

Here’s a picture of McKinsey’s fossil fuel peak

https://fingfx.thomsonreuters.com/gfx/mkt/znvnebogjpl/fossilsmckinsey.PNG

Nikos Tafos, senior associate at the Center for Strategic and International Studies said that prices for fossil fuels would remain volatile.

    “The risk of a supply-demand imbalance is greater in a market that is shrinking where the case for further investment is weak, which could produce short-term rallies.”