Energy prices: post-Covid rally will burn out


Inflation itself proved to be one of the biggest price surprises of 2020. Energy costs supplied the push. In a particularly strong period for commodities, crude oil stood out. Yet even this rally pales beside European natural gas prices. In the UK, near-term costs have soared by roughly four times. What happens next depends on the way in which energy producers balance their greed with fears of triggering an economic slowdown.

Oil’s fluctuating price is one of the best barometers of the global economy. Rising prices have spooked central bankers and bond traders. OECD crude stocks have fallen well below the seasonal average range over 2015-19, according to data from the US Energy Information Administration. Crude producers, bruised by weak prices in the two years prior to the pandemic, opted against an immediate opening of the spigots in 2021.

Lex thinks higher energy prices will tempt both Opec+ (including Russia) and non-Opec US shale producers to put more barrels on the market. American oil drillers alone could add more than 1.1m barrels per day of supply in 2022, thinks the International Energy Agency. That would cover about a third of the expected growth of world demand. The US will not return to its pre-Covid rate of output until the end of 2022. But together with Opec’s promised increases, this should sate consumers’ thirst for oil in the year ahead.

Chart showing the rising price of oil

An unusual jump in all heating fuels, especially natural gas, before the northern hemisphere’s winter worried politicians. Russia’s Gazprom pinned its unwillingness to send more oil Europe’s way on its own depleted inventories.

But the fears look unnecessary. Only a freezing winter in the UK and Europe could send gas prices sustainably much higher than they are now. North America, in contrast, still has sufficient gas supply and plenty of gas drillers keen to take advantage of prices not far off 10-year peaks.

A faster than expected pick-up in demand this year looks unlikely to be repeated in 2022. Coupled with more oil supply from Opec and its rivals, expect energy prices to travel sideways or even down in the next 12 months.

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