Why are the prices of natural gas and oil rising?

Energy prices have taken a huge turn in Europe and around the world over the past year, following a scorching 2020 conditioned by the pandemic. The current spot price of TTF – a virtual platform for natural gas trading in the Netherlands – is currently trading around € 75-80 / MWH (Megawatts per hour). The same quote was around € 5 / MWH in May 2020 and from there it has increased continuously to current levels. Since 2003, when TTF was created, prices above 30-35 € / MWH did not exist for extended periods. The current oil price around $ 80 / barrel is also trading above its long term average of cca. $ 50 / barrel – that is, if historical prices are adjusted for inflation.

There are a number of reasons that have caused the current situation. On the demand side, as economies recover from the pandemic, travel resumes and lockdowns ease, demand has increased for oil and gas.

From a supply perspective, oil and gas production are cyclical industries with lower prices for typically five to seven years, followed by years of high price levels. The year 2015 resulted in more depressed prices, which led industry players to invest less in new production capacity, creating a supply bottleneck and thus pushing energy prices on the rise.

The production of shale oil and gas, primarily in the United States, has also influenced prices around the world over the past decade. Shale is a porous rock that contains oil and natural gas. Major technological developments have made the extraction of these oil reserves profitable with world oil prices much lower. In 2010, cca. $ 100 / barrel was needed to make it profitable, whereas today it can generate a profit of as little as $ 30 / barrel. This factor has helped keep oil prices lower over the past few years, but shale oil companies had racked up huge debts in the first half of the 2010s and focused on normalizing their balance sheets instead of launch new projects and thus increase production.

Regarding shale gas, the technological developments mentioned above have made the United States one of the largest natural gas exporters in the world, in the form of liquefied natural gas (LNG), transported on ocean carriers. . Europe has been a reliable customer for these LNG exports, but towards the end of 2020 demand suddenly and unexpectedly increased in Asia, so American exports quickly reacted and turned away from Europe. where demand was momentarily lower. Earlier in 2021, players in the European market may have waited for prices to return to lower levels and reduced their gas purchases in the first and second quarters. However, demand in Asia did not decline as expected and Europeans were forced to start buying at higher levels, stretching prices even further.

In addition, current social trends are also a factor affecting energy prices globally. There is increasing awareness of the negative impacts of global climate change. Extraction of fossil fuels and increased production are viewed increasingly negatively. This process is represented by the ever-growing interest in ESG (Environmental, Social and Governance) investments which take these factors into account when making investment decisions. The main investment managers have created ESG funds and their size is growing rapidly, creating a reduction in demand for shares of energy companies. Since the executives of energy companies are partly remunerated in company shares, the C-level is encouraged to adhere to changing stock market trends, reduce investments in production capacity and attempt to serve the base of investors with “greener” projects.

All of the above factors have contributed to current energy prices. Some of them have short and medium term effects, however, the case for longer term impacts is also well placed. “This is the first run of a multi-year and potentially decade-long commodities supercycle,” said Jeff Currie, global head of commodities research at Goldman Sachs Group Inc. Since energy is the price of inputs in virtually all manufacturing and transportation activities, inflation could see strong upward pressure in subsequent years from this sector. Without a doubt, the long term trend in support levels could be conditioned by a variety of unknowns. Nonetheless, the ESG trend seems to be the most plausible long-term trend going forward.

Disclaimer: This article was published by Tamas Jozsa, Research Analyst at Calamatta Cuschieri. For more information visitwww.cc.com.mt. The information, views and opinions provided in this article are provided for educational and informational purposes only and should not be construed as investment advice, advice regarding particular investments or investment decisions, or tax advice. or legal.

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Felix J. Dixon

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