A ping in one market suddenly becomes a pong in another before pinging and ponging more times. The ball in constant motion has investors, lenders, traders, and even industry executives reacting with no time to understand what is happening. It is a wild world like Alice’s Wonderland.
The Russia-Ukraine confrontation kicked off increased market volatility. Would energy become a weapon in the war, or merely an unfortunate casualty? NATO nations supporting Ukraine suddenly realized that their economies depended on Russian fossil fuels. Without them, economic mayhem would ensue, causing financial ruin for businesses and families, and leading to human suffering. The visceral reaction of wanting to punish the Putin-regime was quickly moderated, as the cost of responses was too great too bear. Instead of strong economic and military responses, the western world entered an era of seeking the maximum pressure on Russia’s economy and finances while causing the least disruption at home.
The war has added to the economic challenges economies were facing, as they struggled to contain rising inflation from a faster economic recovery from the pandemic-slowed world, supply chain disruptions, an energy crisis created by natural and human-caused actions, and huge amounts of monetary and fiscal stimulus to help citizens cope with Covid. Forty-year highs in inflation prompted central banks to start hiking short-term interest rates. High inflation and high interest rates are undercutting economic activity, leading to the World Bank and the International Monetary Fund trimming their global growth forecasts for 2022-2023. The U.S. economy surprisingly slumped in the first quarter, despite solid consumer spending. Some of that spending strength is from higher prices! But where do we go from here?
The politics of energy are being driven by messaging for the upcoming mid-term elections. The Biden administration released massive amounts of crude oil from the Strategic Petroleum Reserve to try to drive gasoline pump prices down. Drivers/voters need relief. At the same time, Biden is rewarding his liberal supporters by hamstringing the petroleum industry, limiting its ability to grow production that would lower pump prices. What is an oil company executive to do? U.S. oil inventories remain well below the 5-year average, signaling that tight markets and high oil and refined product prices are here to stay. Since the March 31 SPR release announcement, near-term oil futures prices have moved up, while distant prices are lower, reflecting growing concern over the weaker economic outlook. The turmoil in markets is likely to continue well into the summer. The course of the wars—Ukraine, inflation, Covid, and energy—will drive the news cycle, and in turn the volatility of oil prices.
NATURAL GAS:
Right now, the natural gas market is all about helping Europe avoid a human disaster. The continent is captive to Russian gas supply and haunted by the threat of a supply cutoff, possibly due to the demand for payment in rubbles and not dollars. For several months, an armada of LNG tankers have hauled U.S. gas to Europe, nearly abandoning the Asian market. Choosing where to sell LNG is easy when Europe pays more than Asia and seven-times Henry Hub prices. We will see how long Asian buyers are benevolent, especially when the calendar dictates time to refill storage for next winter.
The U.S. and Europe have pledged to get an incremental 15 billion cubic meters of gas to the continent by the end of the year and an incremental 50 bcm by 2030. No one knows how it will get done or where the extra supply will come from. U.S. LNG exporters are running at capacity, although the industry was able to ship 4.3 bcm to Europe in January, a hefty increase over year-ago shipments.
The additional LNG came from the two newest U.S. LNG terminal expansions this year, but there will be no further volumes available before 2024. A tight global gas market exists, as there are few new LNG export terminals being built anywhere. Therefore, for more gas to get to Europe requires redirecting it from other customers. A potential incremental supply source could be China, as it takes more gas from Russia and displaces LNG volumes it currently anticipates importing.
Forget the political implications of such an arrangement.
For U.S. gas consumers, the LNG market will operate at capacity keeping demand up and prices elevated. The world finds its gas storage volumes at historical lows, which will need to be rebuilt before next winter. This is also true in the U.S. As the world’s largest exporter of gas, high domestic natural gas prices will be sustained. High prices signal the market wants more production if we do not want to enter next winter with low storage volumes, which could mean power supply challenges if weather is colder than normal.
It is still shocking how geopolitical events, the current U.S. administration’s anti-fossil fuel governance agenda, and producers responding to the demand of their shareholders to exercise greater financial discipline and return more cash to investors have combined to transition the world’s gas industry from chronic oversupply to sustained undersupply. Americans’ electricity and gas bills are going up and will stay elevated into next year. Politicians who attack the gas industry and then beg for it to deliver more supply are finding that this hypocritical attitude is extending the industry’s typical response time to commodity price signals. That delay is and will continue to create hardships for consumers. This situation could have been avoided if all parties had handled their roles differently.
This story was originally featured in ON&T Magazine’s May 2022 issue. Click here to read more.
