Global energy markets are entering a winter of discontent

Energy costs have been painful this summer, but look even worse this winter.

Oil and natural gas supply markets remain incredibly tight with little relief in sight. Consumers should prepare for a winter of discontent and rising prices.

Indeed, Russia sits at the heart of both markets and Moscow’s ability to influence prices and supply beyond its European regional market is becoming more evident by the day as demand grows. in fall and winter.

In oil markets, consumers have seen lower prices at the gas pump since June. The national average for regular unleaded is below $3.83 a gallon — after hitting a record high of over $5 a gallon earlier this summer.

But economic recession fears, not supply and demand fundamentals, are responsible for most of the drop in oil commodity prices. Inventories of crude oil and refined products such as gasoline, diesel, jet fuel and heating oil remain extremely low.

While consumers may choose not to drive to some degree to reduce their exposure to high gas prices, they have fewer choices in the winter when it comes to heating their homes and offices.

It’s no surprise that the Biden administration is concerned about this dynamic, especially with the midterm elections fast approaching in early November. US Energy Secretary Jennifer Granholm has told major oil refiners to stockpile product rather than export fuels to Europe and other starving markets. The request reveals the administration’s fundamental lack of understanding of how energy markets work.

Oil markets are global, and US refiners export petroleum products because price signals abroad tell them to. These signals suggest that some markets outside of the US need certain refined products more than the US market – and if US refiners don’t provide supply, prices across the global oil complex will rise even more.

Refiners are seeing raw material costs rise after OPEC+ leader Saudi Arabia threatened to cut production last week. This effectively put a floor of about $100 a barrel below crude prices.

But there are reasons to think that prices will continue to rise. Unprecedented releases of crude oil from strategic US stockpiles end in October, an Iranian nuclear deal that would release additional oil supplies remains elusive and the official EU embargo on Russian oil takes effect in early December.

The EU embargo will force Russia to find alternative markets for more than one million barrels per day of its crude exports and another million barrels per day of its refined product exports.

There is no guarantee that Asian markets – mainly China and India – will accept these barrels, and Western efforts to put a “price cap” on Russian oil could leave them stranded. Moscow could choose to arm the oil markets as it did with natural gas by withholding barrels to raise prices.

As if there weren’t enough scares in oil markets at the moment, Iraq appears to be on the brink of civil war as the political crisis in OPEC’s second-largest producer deepens.

At home, the hurricane season in the Atlantic remains a big question mark and a huge risk. September and October are typically the most active months for severe storms, which in recent years have destroyed major U.S. supplies along the Gulf Coast from refiners and upstream oil and gas producers.

Global markets cannot afford more disruption, not with consumer countries desperately trying to fill their storage tanks before winter.

If the situation in the oil markets is dire, it pales in comparison to the desperate state of the global natural gas market. Gas and liquefied natural gas (LN
NL
G) prices jumped around the world, beating previous records set after the outbreak of conflict in Ukraine in late February.

In Europe, the tumultuous situation surrounding the gas flow of the Nord Stream 1 gas pipeline has again resurfaced, with a maintenance shutdown unexpectedly announced by its Russian owners. The situation has sent shockwaves through gas supply chains, with prices in Europe, the United States and Asia hitting record highs on the news.

Russia has even more control over gas supplies, and there remains little clarity on Moscow’s plans. Global gas markets are more connected than ever, so with Russia supplying Europe with – at best – only 20% of its capacity in the Nord Stream 1 pipeline, the effects on the availability of gas supply are very real.

The result is a mad rush for liquefied natural gas (LNG) supplies, with Europe and Asia competing for limited freight shipments to ensure enough gas to keep the lights and heat on all winter long. .

With the war in Ukraine looking more and more like a protracted conflict, an easing of pressure on energy supplies seems something of a sure thing. The fate of global gas prices rests largely on the whims of Russian President Vladimir Putin. A scary thought, indeed.

And while US consumers are somewhat insulated from market chaos due to abundant domestic natural gas reserves, we remain vulnerable to rising prices due to Europe’s growing reliance on LNG imports. US, increasing competition with domestic retail and industrial users.

Benchmark natural gas prices in the United States recently hit a record high of over $10 per MMBtu after a 20 years of low prices. Extreme heat has added to demand across much of the United States as homes and businesses turn to air conditioning for relief. But there is no doubt that America is feeling the effects of tight global supply.

US natural gas has generally averaged between $2 and $4 per MMBtu in previous summers. But domestic gas storage levels are well below the five-year average and last year’s levels for the same period, which will keep Henry Hub prices high.

With its vast reserves of oil and gas, the United States could do more to help mitigate the worsening global energy crisis. But domestic producers don’t see the political will in Washington, where the Biden administration remains focused on climate change rather than energy security. The inevitable “winter of discontent” could offer policymakers a powerful reality check.