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Major economies may need to reconsider their dependence on natural gas in the face of rising energy prices, more frequent extreme weather events, and the accelerating energy transition to renewable sources, according to market participants.
While the U.K., Texas, and California differ dramatically in many capacities, these economies are united in their over-reliance on natural gas for power generation—as the fossil fuel accounts for nearly 40%, 51%, and 48% of their respective energy mixes, according to governmental data. Despite several risks that have threatened natural gas’ viability and reliability for these economies, leaders remain faithful to natural gas for their energy grids’ immediate futures.
In the immediate term, energy prices have ricocheted between highs and lows in recent months, resulting in the shuttering of some energy companies in the U.K. and putting pressure on U.S. markets. Additionally, devastating wildfires that raged across California in the summer and a polar vortex that froze Texas last winter have called the resiliency of the states’ energy mixes and grids into question. Moving forward, the energy transition away from fossil fuels won’t necessarily leave natural gas behind, as many market participants see the fuel as a bridge between current and more sustainable conditions.
The U.K. remains “confident that there is not a risk to security of supply and that the system will continue to deliver over the winter period,” and that within the country’s market "what we're seeing now is very high gas prices, but we're not seeing in the U.K. system a shortage of gas supply at the moment," Alexandra Howe, the U.K. Department for Business, Energy, and Industrial Strategy’s head of gas security, said at a Dec. 14 industry seminar, according to S&P Global Platts.
Texas’ top utility regulator assured market participants that "the lights will stay on" this winter due to the power grid reforms requiring winterization, new generating facilities, and coordination with natural gas suppliers that has been implemented in the state since frigid conditions in mid-February triggered widespread outages and prompted rolling power blackouts. "No other power grid has made as remarkable of changes in such an incredibly short amount of time as we have. And we will continue to improve our grid and our market,” Peter Lake, chairman of the Public Utility Commission of Texas, said during a Dec. 8 media briefing, according to S&P Global Platts.
Although many utilities in California are on track to achieving the state’s climate goals, market participants see the state’s overdependence on natural gas holding the overall economy back from making sufficient progress toward emissions reductions.
“Natural gas is quickly becoming California's Achilles' heel across sectors," Patrick Adler, a research manager at the Beacon Economics, said in a statement announcing the Los Angeles-headquartered consulting firm’s 13th annual California Green Innovation Index. “Gas use is on the rise in buildings, even as our state leads the nation with policies to phase it out in new construction. In the power sector, we added more new gas generation than any other resource in 2020. To meet our climate targets, we need to reverse these trends, and quickly."
Both the Permian Basin and Southern California markets are facing natural gas price pressures, according to S&P Global Platts.
Today is Wednesday, December 15, 2021, and here is today’s essential intelligence.
The Credit Cycle
Default, Transition, And Recovery: Weakest Links Have Fallen Over 50% To Date In 2021
The number of weakest links—issuers rated 'B-' or lower by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications—has fallen 55% to 216 as of Nov. 18, 2021. The drop in the number of weakest links can be attributed to a decrease in the number of lower rated issuers with a negative bias, which has fallen to a record low of 24% in November, from 52% in December 2020, implying a lower risk of defaults in the near term.
—Read the full report from S&P Global Ratings
North American Speculative-Grade Corporates Have A Whole Lotta Liquidity (And Upgrades)
Since the summer of last year, North American corporate entities have reaped the benefits of highly favorable lending conditions, tapping capital markets awash with liquidity and setting issuance records. Based on S&P LCD, in 2021 (through Nov. 12), leveraged loan volume was about $576 billion, and high-yield issuance was over $445 billion.
—Read the full report from S&P Global Ratings
Credit Trends: The U.S. Distress Ratio Remains Low Despite A Record Number Of Speculative-Grade Issuers
The U.S. distress ratio—the proportion of speculative-grade (rated 'BB+' or lower) issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries—increased slightly to 2.6% as of Dec. 6, 2021, up from 2.3% in the previous month. Low recent levels, including the 2021 average of 2.9%, are influenced by our calculation method, which accounts for all speculative-grade issuers.
—Read the full report from S&P Global Ratings
Fed Could Raise Rates Sooner, But 1970s-Style Inflation Not On The Table
Most economists expect the Fed to begin raising short-term rates in the second half of 2022, a few months after wrapping up the taper of its bond-buying program. Fed Chairman Jerome Powell said last week that the central bank's bond purchases could end a few months sooner due to strong economic growth and high inflation.
—Read the full article from S&P Global Market Intelligence
Banking Industry Under Pressure
U.K. Banks Show Balance Sheet Resilience In Latest Stress Test
The U.K.'s seven major banks and largest building society have passed the Bank of England's latest stress test. In the results published yesterday, each institution exceeded the capital and leverage hurdles set in the exercise, with none required to revise capital or distribution plans. S&P Global Ratings believes this outcome illustrates the groups' robust balance sheets and resilience to potential stress, including a further escalation of the COVID-19 pandemic.
—Read the full report from S&P Global Ratings
Spain's BBVA Increasingly Reliant On Turkey, Mexico, Other Emerging Markets
Banco Bilbao Vizcaya Argentaria SA is increasingly reliant on its Turkey, Mexico, and South America business as it bets on emerging markets to fuel its growth. The Spanish bank's assets in these three regions totaled 34.4% of the group total at the end of September, up from 30.1% at the end of 2020. Loans saw a similar shift, and net interest income from the Mexico business increased to 39.5% from 31.9% of total assets over the same period, according to S&P Global Market Intelligence data.
—Read the full article from S&P Global Market Intelligence
ESG in the Time of COVID-19
Path To Net-Zero: Oil, Gas Industry On Trajectory To Miss 2-Degree Climate Goal
The number of major oil and gas operators pledging to hit net-zero emissions from their company's operations and supply chains, known as Scope 1 and Scope 2 emissions, increased from 50% to 70% over the past six months, according to reports from 30 companies compiled by S&P Global Market Intelligence in November. Net-zero carbon goals are needed to bring industries into alignment with the targets of the Paris Agreement on climate change.
—Read the full article from S&P Global Market Intelligence
Listen: Oil And Gas Industry Strikes Back Against Energy Transition At The World Petroleum Congress
The World Petroleum Congress in Houston brought back a sense of normalcy to the energy sector as both the industry and the world continue to grapple with the coronavirus pandemic. But the other existential threat for fossil fuels is the burgeoning energy transition and switch to cleaner sources of power and fuels.
—Listen and subscribe to Commodities Focus, a podcast from S&P Global Platts
The Future of Energy & Commodities
Fuel For Thought: Cambo’s Demise Could Prove A Blow To U.K. Energy Security, Transition Leadership
The demise of the U.K.'s Cambo oil project could prove a pivotal moment for the country's offshore industry, one that risks the province's future production outlook and the expertise that could contribute to global transition goals. Shell's backing of Cambo, a project in remote Atlantic waters west of the Shetland Islands targeting hundreds of millions of barrels of heavy crude, looked increasingly untenable against the backdrop of the U.K. hosting UN climate talks in Glasgow and a drumbeat of environmental opposition.
—Read the full article from S&P Global Platts
Commodities 2022: Global Lithium Market To Remain Tight
Seaborne lithium carbonate prices have gained 413% since the start of 2021 to $32,600/mt CIF North Asia on Dec. 14, while lithium hydroxide prices have climbed 254% over the same period to $31,900/mt CIF North Asia, according to S&P Global Platts data. Lithium prices were due to remain strong going into 2022, according to a number of market players, due to bullish supply-demand dynamics.
—Read the full article from S&P Global Platts
Written and compiled by Molly Mintz.