Why aren’t oil and gas prices soaring?
Against all odds, oil and gas prices are remaining relatively low. OPEC+ does not seem to have succeeded in its attempt to stimulate a rise in barrels. The deepening of the Economist
In the months following Russia's invasion of Ukraine, any hint of bad news sent energy prices skyrocketing into the stratosphere. When a fire shut down an American gas plant, strikes clogged French oil terminals, Russia demanded Europe pay for fuel in rubles, or the weather seemed more inclement than usual, the markets raged. Since January, however, things have been different. Brent, the world's benchmark oil, is hovering around $75 a barrel, up from $120 a year ago; In Europe, gas prices, at 35 euros ($38) per megawatt-hour (mWh), are 88% lower than their peak in August.
It's not that the news has suddenly become more favorable. The Organization of the Petroleum Exporting Countries (OPEC) and its allies have announced huge production cuts. In America, the number of oil and gas rigs has declined for seven weeks straight as producers respond to the meager payouts on offer. Several Norwegian gas plants, now vital to Europe, are under extended maintenance. The Netherlands is closing the largest gas field in Europe. However, any price rally fades quickly. What is keeping prices down?
Is Demand Keeping Oil Prices Down?
The disappointment of the question may be part of the answer. Expectations for global economic growth have been reduced in recent months. The bankruptcy of several banks in the spring raised fears of an imminent recession in America. In Europe, inflation is hitting consumers. In both countries, the impact of interest rate hikes has not yet been felt. Meanwhile, in China, the post-covid recovery is proving much weaker than expected. The anemic growth, in turn, is dampening fuel demand.
On closer inspection, however, the story of the question is not entirely convincing. Despite the disappointing recovery, China consumed 16 million barrels per day (b/d) of crude oil in April, a record. The recovery in trucking, tourism and travel after the bleak Covid Zero period means that more diesel, petrol and jet fuel are being used. In America, the 30% drop in gasoline prices compared to a year ago bodes well for the summer season. In Asia and Europe, high temperatures are expected to persist, creating higher demand for gas-fired power generation for cooling.
A more compelling explanation is found on the supply side. The past two years of high prices have boosted production outside of OPEC, which is now starting up. Oil is flowing from the Atlantic Basin, thanks to a combination of conventional wells (in Brazil and Guyana) and shale and tar sands production (in America, Argentina and Canada). Norway is also pumping more. JPMorgan Chase estimates that non-OPEC production will increase by 2.2 million b/d in 2023.
In theory, this should be balanced by production cuts announced in April by core OPEC members (by 1.2 million b/d) and Russia (by 500,000 b/d), to which Saudi Arabia added another million b/d in June. However, these countries' production has not fallen as much as promised – and other OPEC countries are ramping up exports. Those of Venezuela are on the rise, thanks to the investments of the American giant Chevron. Iran's are at their highest since 2018, when America imposed new sanctions. Indeed, a fifth of the world's oil now comes from Western embargoed countries, which sell at a discount and thus help dampen prices.
The gas situation
As for gas, the supply situation is more complicated: the main Russian gas pipeline carrying gas to Europe remains closed. But Freeport LNG, a facility that handles a fifth of America's liquefied natural gas exports and which was damaged in an explosion last year, is back in operation. Other Russian exports to continental Europe continue. Norwegian flows will fully resume in mid-July. Most importantly, existing stocks in Europe are large. The block's storage facilities are 73% full, up from 53% a year ago, and are on track to meet their 90% target by December. Even rich Asian countries, such as Japan and South Korea, have plenty of gas.
When inflation was skyrocketing and interest rates remained low, commodities, particularly crude oil, provided an attractive hedge against rising prices, driving prices up thanks to the influx of investors. Now that speculators expect inflation to fall, the appeal has diminished, just as rising rates make safer assets like cash and bonds more attractive. As a result, net speculative positioning (the balance between long and short bets placed by punters in the oil futures markets) plummeted. The higher rates also increase the opportunity cost of holding crude inventories, so physical traders are offloading their inventories. The volume of floating deposits fell from 80 million barrels in January to 65 million barrels in April, the lowest since the beginning of 2020.
Prices may rise, but the nightmare of 2022 will not repeat itself
Prices may increase throughout the year. The International Energy Agency, an official forecaster, expects global oil demand to hit a record 102.3 million barrels/day in 2023. Oil supply will also hit a record, but the forecaster believes the market will be in deficit in the second half of 2023, a view shared by many banks. As winter approaches, competition for LNG cargoes between Asia and Europe will intensify. Winter freight rates are already increasing in anticipation.
However, last year's nightmare 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 current levels by the autumn, rather than anything more extreme. Commodity markets have adapted over the past 12 months. Now it takes more than a hint of bad news for prices to skyrocket.
(Excerpt from the press release of eprcommunication)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/prezzi-petrolio-gas-bassi-perche/ on Sun, 25 Jun 2023 05:14:16 +0000.