Epic fall of Gas Price in Europe and the Inevitable Impact on the Oil Price


Epic fall of gas price

The price of natural gas, LNG, has fallen more than 50% from its peak, when Russia invaded Ukraine. The unprecedented plummeting in price of the commodity has left both investors and analysts in a state of bewilderment, when they anticipated the polar opposite, especially at the height of winter season in the northern hemisphere.

In response, the prices of crude oil have been falling as well in the New Year; as of 15:00 GMT, the price of WTI and Brent futures stood at $74.88 and $79.89 respectively; the price of LNG was at $4.06 , recording more than 50% drop since its peak.

Of course, the temperatures in the New Year so far have been very mild with mercury staying at double digits. With more than two months to go before the end of winter, things can still change, especially in February, though.

Since the process of forecasting the temperatures more than a few days ahead is no better than that of predicting the commodity prices in a similar period, despite the advent of AI - and endless number crunching - relevant actors in the realm of energy are, more or less, at the mercy of nature, when it comes to sensing the perfect trends in the markets; at present, in the absence of perfect science, they are as illusive as ever. 

Moreover, the slow growth of global economy, the rapidly-evolving Covid-19 situation in China - and the inevitable political fallout that stems from the travel restrictions imposed on the Chinese travelers to the West - the war in Ukraine - and its unpredictable twists and turns - collectively form an inverse catalyst for the dynamism of the energy markets. 

Understandably, the reverberations are being felt beyond gas markets: on one hand, the fall of gas price do not compel industrialists to embrace oil as a viable alternative to address their energy demands; on the other hand, the price of natural gas has been a key factor in determining the price of crude oil recently while eclipsing the relevance of the US crude stocks.

In this context, it is understandable if Saudi Arabia, the world's top exporter of crude oil, cuts its price to Asia again in February in order to shore up its dwindling barrel count; the price has already been set at 10-month low. 

At present, two of its major customers, China and India - the world's second and third largest consumers respectively - are on a happy buying spree from Russia at heavily-discounted prices in while reaping the benefits of being loyal to the latter in its hour of need.

Against this backdrop, the head of the IMF, International Monetary Fund, has already warned that the global economy would see a tough year in 2023. In this context, financial analysts anticipate yet another rate hike in the US, in addition to the rate hike by 50 basic points in December, that could potentially weaken the economic activity in the world's largest economy - when the latter can least afford to do so.

All in all, investors in the energy sector are much more cautious than they were at this time last year for obvious reasons; the war in Ukraine had not broken out at that time; nor was there any indication that President Putin was about to unleash his military might on its weaker neighbour.

On a positive note, if China manages to keep the Covid-19 threat at bay, the energy markets - especially, the producers -  may still see the light at the end of the tunnel. China's reluctance to update the data on its Covid-19 infection rates, meanwhile,  does not help investors to breathe a sigh of relief amidst looming uncertainty. 

If China keeps increasing its export quotas for refined oil products, however, things can only get worse for the energy markets in general and crude oil markets in particular, as it is, more or less, a harbinger of a worrying development over the dwindling demand. 


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