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Contrary to expectations, oil and gas are still cheap

IA few months After Russia’s invasion of Ukraine, even a little bit of bad news pushed energy prices into the stratosphere. Markets went wild as fires forced American gas plants to close, strikes clogged French oil terminals, Russia demanded Europe pay rubles for fuel and worse than usual weather. However, things have changed since January (see chart). Brent crude, the global oil benchmark, is hovering around $75 a barrel, compared with $120 a year ago. In Europe, gas prices are €35 ($38) per MWhMuh) is 88% below the August peak.

The news did not suddenly become more acceptable. Organization of Petroleum Exporting Countries (OPEC) and its allies announced significant production cuts. In the US, the number of oil and gas rigs has fallen for the seventh straight week as producers respond to the meager rewards offered. Some of Norway’s gas facilities, now vital to Europe, are under long-term maintenance. Holland closes Europe’s largest gas field. However, the price increase quickly fades. What keeps the price down?

Disappointing demand may be part of the answer. In recent months, expectations of global economic growth have receded. Several bank failures this spring heightened fears of an imminent recession in the United States. Inflation is hitting consumers in Europe. Neither region has yet fully felt the impact of higher interest rates. On the other hand, in China, rebound after corona It turns out to be much weaker than expected. Increased anemia is reducing fuel demand.

But upon closer inspection, the story of this demand is not entirely convincing. Despite a disappointing recovery, China consumed a record 16 million barrels per day of oil in April. A recovery in trucking, tourism and travel after the harsh zero-corona era means more diesel, petrol and jet fuel use. Gasoline prices in the US are down 30% from a year ago, boding well for the summer driving season. High temperatures are expected to continue in Asia and Europe, increasing demand for gas-fired power generation for air conditioning.

A more plausible explanation can be found on the supply side of the equation. Rising prices over the past two years have encouraged production abroad. OPEC, went online. Oil is welling up from the Atlantic Basin through a combination of conventional wells (Brazil and Guyana) and shale and tar sands production (USA, Argentina, Canada). Norway also supplies more pumps. JP Morgan Chase BankOPEC Output will increase by 2.2mb/d in 2023.

In theory, this should be balanced by production cuts announced by the core companies in April. OPEC In addition to Member States (1.2 million barrels per day) and Russia (0.5 million barrels per day), Saudi Arabia added 1 million barrels per day in June. However, production in these countries has not fallen as much as promised. OPEC Countries are increasing their exports. Venezuela is on the rise thanks to investment from American giant Chevron. The number of cases in Iran is the highest since 2018, when the US imposed new sanctions. In fact, one-fifth of the world’s oil now comes from countries embargoed by the West, which is sold at discounted prices, helping to keep prices in check.

For gas, the supply situation is even more complicated, with the main Russian pipeline to Europe remaining closed.but freeport lng, a facility that handles one-fifth of U.S. liquefied natural gas exports, resumed operations after being damaged by an explosion last year. Other Russian exports to continental Europe continue. Sailing from Norway is expected to fully resume in mid-July. Most importantly, existing stocks in Europe are huge. Our block storage facility is 73% full (53% a year ago) and we are on track to reach our 90% target by December. Rich Asian countries such as Japan and South Korea also have abundant gas.

When inflation soared and interest rates stayed low, commodities, especially oil, were attractive hedges against higher prices, and investors flooded in, pushing prices higher. Now that speculators expect lower inflation, it’s less attractive, as is higher interest rates. Safer assets like cash and bonds are more attractive. As a result, speculative net positioning (the balance between long and short bets investors make in the oil futures market) has declined. Physical traders are selling crude oil inventories as rising interest rates also increase the opportunity cost of holding crude oil inventories. Floating storage fell from 80 million barrels in January to 65 million barrels in April, the lowest level since early 2020.

Prices are likely to rise later this year. The official forecasting agency, the International Energy Agency, predicts that global oil demand will reach a record high of 102.3 megabytes per day by 2023. Oil supplies will also hit a record high, but forecasters expect the market to slip into the red in the second half of 2023. 2023 — Many banks share this view.Competition intensifies as winter approaches lng Freight between Asia and Europe will increase. Fares for the winter are already on the rise.

Still, last year’s nightmare is unlikely to repeat itself. Many analysts expect Brent oil prices to hover around $80 a barrel and fall short of triple digits. Gas futures markets in Asia and Europe are pointing to a 30% rise from today’s levels by the fall, not even more extreme. Over the past 12 months, commodity markets have adapted. Now, any bit of bad news causes prices to skyrocket.

https://www.economist.com/finance-and-economics/2023/06/19/against-expectations-oil-and-gas-remain-cheap Contrary to expectations, oil and gas are still cheap

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