Ebullient stock investors saw no reason to scale back their optimism or deviate from their ‘close-your-eyes-and-buy’ approach for the better part of yesterday. The macroeconomic backdrop has seemingly become increasingly encouraging as the US President, sweeping through the Far East, leaves trade deals with regional powers in his wake. Among these are the lowering of reciprocal tariffs with South Korea to 15% and the signing of an agreement with Japan that includes the supply of rare earth minerals. The 800-pound gorilla, however, was always China, ahead of today’s ‘who-blinks-first’ summit with the leader of the world’s second-largest economy. President Trump has hailed the outcome; the market hasn’t. Within the framework of a one-year trade agreement, the US has reportedly reduced punitive import tariffs in exchange for China resuming soybean imports, lifting rare earth export controls and cracking down on fentanyl shipments. Details are still emerging at the time of writing, but given the tepid market reaction, the deal seems more like an immediate de-escalation in tension than a structural change in trade relationship.

The 0.25% rate cut by the US central bank is expected to further stimulate the domestic economy, although its chair called for remaining pragmatic about another decrease, come December. The Fed has also decided to end quantitative tightening and to shrink its balance sheet, aiming to improve market liquidity amid deteriorating labour market conditions. The tech sector has not disappointed either, with Nvidia now valued at $5 trillion. That’s 12 zeroes after 5. Alphabet reported a quarterly revenue of over $100 billion for the first time, although Meta was punished post-settlement because of its sky-high spending in AI.

Given this relatively conducive macroeconomic picture, it is perplexing to have seen oil prices advance by a mere 50 cents per barrel, especially after learning that US commercial inventories plunged by 16 million barrels last week. The crude draw of 6.9 million barrels was driven by imports falling to a four-year low and USGC stockpiles declining by 10 million barrels. Gasoline and distillate inventories tumbled by 5.9 million and 3.4 million barrels, respectively, while proxy demand broke above 21 mbpd. The US economy, thank you very much, appears to be in robust health, and the latest stock data do not foreshadow the long-awaited build in OECD and global oil inventories. Yet, our market seems hesitant to bet against it, as global and OPEC+ supply is set to rise. Or perhaps it is simply reluctant to sign up for an economic Canaan, hence the lukewarm reaction to what can only be described as a comparatively sanguine day at the macro level. And we would subscribe to this view.

The Obvious Choice of Transitional Fuel

As regularly discussed in this report, the adaptation of renewable energy is underway irreversibly, although its pace has been slower than anticipated prior to the Russian invasion of Ukraine. Energy security has grown in importance since 2022. While the use and consumption of solar and wind energy are increasingly prevalent, and the popularity of electric vehicles, despite temporary setbacks, continues to spread, there is no denying that fossil fuels will remain a crucial source of energy in the foreseeable future. Perhaps the biggest loser is coal, the largest emitter of harmful gases, which has been gradually but relentlessly phased out. For the first time ever, renewable energy overtook coal as the major source of electricity generation in the first half of this year, according to think tank Ember.

While renewable energy is undeniably playing an ever-so pivotal role in the global energy mix, it is still far from meeting the world’s energy demand entirely. Numerous hurdles, such as intermittency issues, weather dependency, storage limitations, geographical constraints, transportation challenges, and high investment costs, must be overcome before renewables can become the dominant energy source. In 2024, fossil fuels still accounted for more than 80% of primary energy consumption. Although the direction of change is clear, a transitional fuel is needed for the coming decades, and recent developments suggest that this role will be filled by natural gas, particularly in its liquefied form. Since the outbreak of the Russia–Ukraine conflict, natural gas has played a sui generis role in the global energy mix.

Global energy demand is on an upward trajectory. It increased by 2.2% in 2024, a growth rate higher than the average of the preceding ten years. This increase was primarily driven by surging electricity demand in both developed and developing nations. China and India accounted for the lion’s share of this expansion, though advanced economies also experienced higher consumption. The main factors behind this growth are record temperatures, electrification, and the expanding role of data centres in everyday life, largely due to the seismic rise of artificial intelligence. BloombergNEF estimates that global energy demand will grow by 25% between 2024 and 2050, predominantly because of the relentless rise in electricity consumption.

Natural gas, and, within that, liquefied natural gas (LNG), will play a crucial role in meeting the world’s persistently rising electricity demand. Estimates suggest a significant increase in LNG supply over the next five years, led by major exporters such as the United States and Qatar. In the short term, the outlook may remain relatively bullish due to limited supply growth. Although this year’s supply is expected to rise by 30 billion cubic metres (bcm) and next year’s by 40 bcm, incremental demand (discussed below) will keep the balance tight. From 2027 onwards, however, this balance is expected to loosen progressively, even as demand continues to accelerate, as major new liquefaction projects come online, particularly in the U.S., Qatar, and Mexico. In total, around 300 bcm per year of new LNG export capacity is forecast between 2025 and 2030, with the U.S. claiming the crown of the world’s largest exporter.

On the demand side, the ongoing war in Ukraine has forced the EU, Russia’s largest former natural gas customer, to seek alternative supplies to ensure energy security. The EU plans to phase out Russian gas imports by January 2028. To mitigate the impact of declining Russian supply, the bloc intends to pool demand among member-state importers and secure alternative sources such as Algeria, the U.S., and Qatar.

For the 2026–2040 period, the IEA’s base case scenario projects an average annual demand growth of 1.5%. The key drivers of long-term growth include economic expansion in China, India, and other Asian nations, energy security considerations, and the surge in electricity demand from AI-powered data centres.

LNG is viewed as the most effective bridge fuel, offering a cleaner alternative to coal in power generation. Its role in transportation, particularly for heavy-duty vehicles and ships, is also becoming more significant. LNG provides a consistent and reliable source of power, helping to balance the intermittency of renewable energy sources. Its importance will grow, not diminish, during the energy transition, however long that transition may prove to be.

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