What is really driving oil and gas prices and what is happening to the energy sector? An analysis of the supply/demand dynamics of crucial raw materials for the world.
Through ups and downs, oil and gas prices are down on the upswing in prices triggered by the war in Ukraine.
With WTI hovering around 72 dollars a barrel and Brent trading at 77 dollars a barrel, the levels of over 100 dollars a barrel in 2022 are a long way off. So too is gas in the European reference benchmark, which, although on the rise, it is worth 37 euros per megawatt hour.
However, the pitfalls are lurking, with the Opec strategy led by Saudi Arabia which wants to keep the price of black gold no lower than certain levels and all the problems related to LNG, moves by Russia, and drought shaking the gas market, especially for Europeans.
However, nothing suggests a return to the unprecedented leaps of 2022. What really happens to gas and oil prices and what dynamics are hidden under the fluctuations in prices? An analysis.
Gas and oil: the parable of prices, from rally to decline
In an analysis by The Economist, the recent history of oil and gas prices reveals what is really behind the price swings of recent months.
In the months following Russia’s invasion of Ukraine, any hint of bad news pushed energy prices to new highs. And negative events followed.
A fire forced the closure of an American gas plant, strikes clogged French oil terminals, Russia demanded Europe pay for fuel in rubles or the weather looked bleaker than usual, and the markets went crazy.
Since January 2023, however, things have gone differently. Brent crude, the global oil benchmark, has hovered around $75 a barrel, up from $120 a year ago.
In Europe, gas prices, at €35 per megawatt-hour (mWh), are 88% below their August peak.
In reality, news on the energy sector still impacts prices today. OPEC and its allies have announced sharp production cuts. In America, the number of oil and gas rigs has declined for seven weeks straight as producers respond to the meager rewards on offer.
Many of Norway’s gas plants, now vital to Europe, are under extended maintenance. The Netherlands is closing the largest gas field in Europe. However, any increase in price fades quickly. So what keeps prices low, ask the analysts of The Economist?
How much does the demand factor impact gas and oil?
A disappointing question may be part of the answer as to why energy prices are now lower.
In recent months growth expectations of the global economy have been reduced. The bankruptcy of several banks this spring raised fears of an imminent recession in the US. Inflation is hitting consumers in Europe. In both, the impact of interest rate hikes is still being felt. Meanwhile, in China, the post-Covid rebound is proving much weaker than expected. The anemic growth, in turn, is dampening fuel demand.
Still, looking closer, the weak demand story doesn’t quite convince the experts Despite the disappointing recovery, China consumed 16 million barrels per day (b/d) of crude oil in April, a record. A rebound in trucking, tourism, and travel from the bleak covid-zero period means more diesel, petrol, and jet fuel are being used.
In the United States, a 30% drop in gasoline prices from a year ago bodes well for the summer driving season. In Asia and Europe, the high temperatures are expected to last, creating greater demand for gas-fired power generation for cooling.
Oil and gas supply: is there really a shortage?
A more compelling explanation for falling prices can be found on the supply side.
The last two years of high prices have boosted production outside OPEC, which is now approaching its peak level.
Oil flows from the Atlantic basin, through a combination of conventional wells (in Brazil and Guyana) and the production of shales and tar sands (in America, Argentina, and Canada). Norway is also pumping more. JPMorgan Chase, a bank, estimates that non-OPEC production will increase by 2.2 million barrels per day in 2023.
In theory, this should be balanced by the production cuts announced in April by OPEC members (by 1.2 million b/d) and Russia (by 500,000 b/d), to which Saudi Arabia added another 1m b/d in June.
Yet production in these countries has not decreased as much as promised, and other cartel members are ramping up exports. Venezuelans are on the rise, thanks to investments by Chevron, an American giant. Iran’s are at their highest since 2018 when America imposed new sanctions. Indeed, one-fifth of the world’s oil now comes from Western embargoed countries, being sold at a discount and thus helping to dampen prices.
For gas, the supply situation is more complicated: the main Russian gas pipeline arriving in Europe remains closed. But Freeport NG, a facility that handles a fifth of US exports of liquefied natural gas, damaged in an explosion last year, is back in operation.
Russia’s other exports to continental Europe continue. Norwegian flows will fully resume in mid-July. Most importantly, existing stocks in Europe are full. The block’s storage facilities are 73% filled, up from 53% a year ago, and on track to meet its 90% target by December. Rich Asian countries, such as Japan and South Korea, also have plenty of gas.
Oil and gas price forecasts
However, energy prices could rise during the year.
The International Energy Agency projects that global oil demand will reach a record 102.3 million barrels per day in 2023. Oil supply will also hit a high, but according to the calculation, the market will go into deficit in the second half of 2023: a vision shared by many banks. As winter approaches, the competition for LNG cargoes between Asia and Europe will intensify. Winter freight rates are already going up in advance.
However, the nightmare of 2022 is unlikely to repeat itself. Many analysts expect Brent crude to stay close to $80 a barrel and not reach triple digits. Gas futures markets in Asia and Europe point to a 30% increase from today’s levels by the autumn, rather than anything more extreme. Commodity markets have adapted over the past 12 months. It now appears that it takes more than a hint of bad news for prices to skyrocket.
Original article published on Money.it Italy 2023-06-20 16:59:00. Original title: Cosa sta succedendo (davvero) ai prezzi di gas e petrolio
