Rising gas and crude oil prices not a good omen

Meteorologists are predicting a cold winter, and it could send international energy prices even higher. Record high natural gas prices have forced some utilities to switch to oil, boosting demand for crude. It is feared that oil prices may witness further rise, though not likely to stay there for long.

The spike in oil prices to the highest in years came after OPEC plus decided not to add more barrels than the initially agreed 400,000 bpd monthly. Analysts say that prices could witness further increase. Now, some forecast price may rise to US$100/barrel. The good news is that even if it happens, it won’t last.

Goldman Sachs recently updated its oil price forecast for the final quarter, saying it now expect Brent crude to reach US$90/barrel by end December 2021. The bank believes oil demand could jump by 900,000 bpd if the winter gets harsher.

“While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts,” the bank’s commodity analysts said in late September this year.

Then Bank of America said oil could hit US$100/barrel because of the energy crunch that has now gone global. US Energy Secretary, Jennifer Granholm said last week that the government may release oil from the country’s emergency reserve to lower gasoline prices.

The record-high natural gas prices have forced some utilities to switch to oil derivatives instead, boosting demand for crude and, like Goldman, noted the prospect of a cold winter as another bullish factor for oil.

“If all these factors come together, oil prices could spike and lead to a second round of inflationary pressures around the world,” BofA analysts wrote in a note. “Put differently, we may just be one storm away from the next macro hurricane.”

Yet even if Brent hits US$100/barrel, it is unlikely to stay there for long, according to John Driscoll, chief strategist at JTD Energy Services. And it would take a lot of things to happen for the benchmark to reach this price level.

“I see that as kind of a lower probability scenario. That is, if everything goes wrong, if we have Arctic weather, if we’ve got glitches, breakdowns in the deliverability, the supply chains. That is a possible scenario but I don’t see that likely to be sustainable,” Driscoll told CNBC last week.

Yet the weather is impossible to predict with any accuracy over longer periods of time, and indeed, current forecasts for the winter season differ dramatically among meteorologists, as Bloomberg reported earlier this month.

The rational thing to do, of course, is to plan for the worst possible scenario, which would be a very cold winter. Indeed, this was what Europe and China tried to do and what became one big reason for the gas price spike. Yet some of that spike, at least, was the result of speculation rather than fundamentals. The fact that gas prices dropped after Russian President Vladimir Putin said the country will supply additional gas to Europe.

The benchmark US oil price jumped this week, hitting the highest level in seven years after OPEC plus decided to continue making only small monthly additions to oil supply. Brent prices had risen above US$82/barrel on Tuesday.

Monday’s decision of the OPEC+ group to keep plans for easing the cuts unchanged—despite calls for more supply from consuming countries, including the United States—continued to drive the market on Tuesday.

“The lack of urgency alarmed traders who reacted by sending Brent to a three-year and WTI to a near seven-year high,” Saxo Bank said in a Tuesday note.

“The risk of higher prices is real with demand destruction the next focus, but in the winter months ahead, this level could be substantially higher,” the bank’s strategy team said.

In addition, oil was caught again in the broader energy price rally, which saw record-high gas prices in Europe, yet again, and coal prices in Europe and Asia surging to multi-year highs.

Rallying gas prices are already boosting oil demand with gas-to-oil switch, especially in Asia, Amin Nasser, chief executive officer of Saudi oil giant Aramco said at the Energy Intelligence forum on Monday. Oil consumption has increased by around 500,000 barrels per day (bpd) since the natural gas crunch began, Nasser said, as carried by Bloomberg.

“There is some shift we have seen from gas to liquids, especially in certain markets in Asia,” the executive noted.

Gas prices in Europe are breaking record after record. The UK is facing supply shortages reminiscent of the late 1970s winter of discontent. Chinese factories are shutting down because of power shortages, and the outlook is grim.

When gas prices in Europe started rising faster and faster last month as the continent prepared for winter and found out it was not the only one, gas suddenly became important. That’s after being excluded from the list of low-carbon energy sources and after the EU’s green transition chief Frans Timmermans said gas had no place in the transition. It now appears Timmermans and his fellow Brussels bureaucrats could not have been more wrong.

For years Europe has been retiring coal plants and building solar and wind farms as it strived to become the greenest continent on earth and lead the energy transition on the premise that emissions of carbon dioxide are the planet’s single biggest problem because they lead to unfavorable climate changes. This has been coupled with investment declines in oil and gas production, as this only made sense. Now, the EU has got the first bill for its low-carbon feast.

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