Politicization of energy has involved the use of the SPR to manipulate gasoline pump prices is the antithesis of the reserve’s purpose, which is to protect the country from a supply disruption. Officials ignore that insurance policy since they perceive lower consumer prices to be in their best interest given the upcoming elections.
The politicization of energy extends beyond oil supply manipulation and includes policy actions and rhetoric. The current administration has no qualms overturning existing energy policies embedded in law, as well as ignoring mandated rules if results produce desired outcomes. Jawboning the oil industry easily becomes threatening but exposes the raw political motives of overriding operational realities. Adding to those pressures is that the economy’s outlook continues to worsen with a recession possibility growing. Just how severe might a recession be and how much oil demand might be sacrificed is unknown?
Around the world, energy, especially crude oil, has become a political weapon. In Europe, countries striving to help ally Ukraine and weaken rival Russia, are banning the purchase of its oil and refined products, as well as capping the price the world will pay. However, these moves eventually will harm citizens if world oil supplies cannot rebalance quickly in an era of limited availability. Additionally, in Europe’s push to influence the future climate, countries are actively banning the future sale of fossil-fueled vehicles adding to demand destruction calculations.
Each issue, shaped by daily comments and economic data points, shifts commodity trader sentiments about oil. Sentiments swing from optimism for future oil demand to fear of significant demand destruction. Sometimes, the news is so disconcerting that traders want to throw up! In those days, oil prices drop dramatically, sending commentators seeking historical analogs only found in the 1980s and 2015.
Winter’s duration and severity will be equally as important as the global economy’s health in determining the direction and level of oil prices for the rest of 2022. The Bank of England’s sudden monetary policy reversal, shifting from tightening to easing, has reversed the collapse of the British pound’s value. More significantly, it may signal other central banks to shift from deflating to reflating their economies, even at the expense of stubborn inflationary pressures. Such a policy shift will have profound impacts on long-term economic growth prospects and energy markets, which may keep them supply-challenged for years leading to higher-than normal oil prices. The news flow will continue generating commodity chaos, but with an upward bias to prices after six months of decline.
NATURAL GAS:
Natural gas futures prices slid in September from the $9 per thousand cubic foot level that dominated the last half of August to under $7. Two forces contributed to the slide. First, traders reconsidered supply tightness as the U.S. entered its seasonally weaker air conditioning demand phase and temperatures nationwide moderated.
Secondly, European countries announced they had reached their mandated winter gas storage levels ahead of schedule easing their frantic pace of purchasing liquefied natural gas cargos, much of which was coming from America.
In the traditional shoulder months for natural gas demand, prices ease as storage is in the final topping-up phase and winter heating demand has yet to kick in. At the same time, domestic gas production has been ramping up. Since the end of May, gas output has climbed by four percent or nearly four billion cubic feet per day to 98.8 Bcf/d. As usually happens when gas production grows, traders view an improving supply/demand balance and ease off the push for higher gas prices to entice more supply for winter storage.
With our LNG exporting terminals working at capacity, any easing in gas demand takes the pressure off gas prices. The announcement that Freeport LNG, the export terminal that experienced an explosion and fire in early summer, will resume operations in early October and reach full export capacity by December will add to gas demand, as the feedgas flow to this terminal has been offline since June. That additional supply eased the rebuilding of domestic gas storage without boosting prices substantially higher. The restart of the export terminal will support gas prices and possibly lift them.
Europe’s demand for LNG may have eased, but the recent leaks in the Russia-to-Germany Nord Stream pipelines, whether by sabotage, faulty welds, or an accident, may reverse that easing. Europe is facing the reality it may not have any Russian gas available this winter, although it continues to receive gas from pipelines passing through battle-torn Ukraine, and Turkey. Russia may be using gas as a weapon of war in a push to win the Ukrainian struggle. Europe’s gas supply options are limited, although the continent is making progress in building new LNG terminals and hooking up floating ones, a colder than expected winter will cause undo human suffering.
Europe is asking much of its people. They face high energy prices. They are being forced to conserve energy through government mandates that make their lives less comfortable, as they also watch with fear that their jobs may disappear as companies can no longer operate given the high cost of energy. These concerns spilled out recently with energy protestors across Germany chanting they need Russian natural gas. Is civil unrest the next stage for global natural gas markets? If so, expect U.S. gas prices to remain volatile and influenced not only by domestic weather, power demand, and LNG export forces but also by global sentiment and news about gas price inflation.
This Energy MarketWatch was originally featured in ON&T Magazine’s October 2022 issue. Click here to read more.
