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Oil prices hit multi-year highs after OPEC and other major producers last week chose not to increase production more than expected. However, it was the trajectory of natural gas that monopolized the spotlight after gas prices rose more than 300%. to trade at its highest levels since 2014, overtaking oil and many other commodities.
As the global energy market remains on fire, natural gas prices also increasingly impact crude oil as consumers seek cheaper fuels to replace. Indeed, a major anomaly has now emerged: Power producers are turning around from expensive natural gas to oil, a reversal from the ten-year trend of moving from expensive oil to less natural gas. expensive and cleaner.
It is a nascent but rapidly growing trend that could increase global crude demand by a good 2 million bpd in just a few years.
Gas trade at the equivalent of $ 200 per barrel of oil
Demand for gas in Europe and Asia, especially from China, has remained high this year due to adverse weather conditions and also as economies emerge from lockdowns. Natural gas markets have recently been boosted by expectations of a rebound in demand during the looming winter in the northern hemisphere, as insufficient inventory levels ahead of the winter season have driven gas prices soaring. natural.
The natural gas rally started in Europe several months ago but has spread like wildfire to the rest of the world.
To put current high prices into perspective, experts say gas prices are now trading at the equivalent of more than $ 200 per barrel of oil, with Europe and Asia the hardest hit, making oil look cheap in comparison despite its own impressive rally.
German electricity prices for delivery in 2022 jumped to € 120 / MWh, more than 3 times the average seen over the previous five years, while the price of Dutch TTF gas in the first month climbed to nearly 85 € / MWh or 29 $ / MMBtu or more. 5 times higher than the five-year average. Meanwhile, US traded natural gas prices recently hit a seven-year high of $ 6.25 / MMBtu.
Market experts are now warning that soaring gas prices are likely to increase demand for crude by encouraging a switch from gas to oil and exacerbating the current supply gap in oil markets.
A combination of supply shortages and weaker than expected renewable power generation is forcing utilities to increasingly turn to natural gas and coal in order to maintain the required base load on the electrical network.
“This has never happened before on such a global scale. The market has always tried to replace expensive oil with much cheaper natural gas,” Bjarne Schieldrop, chief commodities analyst SEB, told Reuters.
The magnitude and speed of change vary among energy experts.
Schieldrop put the increase in demand at 500,000 bpd, similar to Saudi Aramco Estimate by CEO Amin Nasser.
JP Morgan put the potential increase in oil-fired power generation by oil-fired electric generators up to 2 million bpd, but said 750,000 bpd by March is more realistic.
Meanwhile, the normally conservative International Energy Agency (IEA) has put demand surge to a more modest level of 200,000 bpd and says the change will be more widespread in Indonesia, Pakistan. , in the Middle Eastern states and in Bangladesh.
No longer works as usual
It’s not business as usual in the oil markets anymore, and the old adage that the best cure for high prices is high prices is unlikely to work.
The big difference this time around is that the focus on ESG and green transformation has peaked and has effectively reduced the normal response of long-cycle investments by producers to soaring prices and growing demand, that is, by stimulating production. Without such a swift response from producers, it seems the only way is to leave the markets to their own devices until prices reach a level where they trigger the destruction of demand.
But with people like JP Morgan who recently said that the economy can handle $ 150 worth of oil, other analysts say hyperinflation will see oil prices hit $ 180 a barrel by the end of 2022 and OPEC + clearly prepared to defend higher prices, it will be interesting to see how far this oil bull will go.
By Alex Kimani for Oil Octobers
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