Power Up: Declining Oil and Gas Inventories Indicates Rising Prices
So those high oil and gas prices – at record highs over several years respectively – that you shook your head? Well it looks like they’re going to keep climbing for quite some time yet.
Stocks of both fossil fuels continue to decline, with OPEC and U.S. shale producers appearing in no rush to turn on crude pumps as gas supplies remain tight.
In the United States, gas production recovered much more slowly than consumption with Reuters noting that gas drillers remained cautious as the economy rebounded.
This took gas inventories from a large surplus at the pre-pandemic five-year average in the second half of 2020 to a deficit by the end of the second quarter of 2021.
Indeed, operating gas stocks in underground storage are currently at their lowest level since 2018.
While this deficit is not as bad as the situation in Europe and Asia, it has not been helped by the increase in LNG exports to Asia and Europe and the slow resumption of drilling and gas production, a combination that has pushed domestic gas prices in the United States to over US $ 5 per million UK thermal units, from around US $ 2-3 million.
This remains paltry compared to prices in Asia, which hit a record heat unit of US $ 50 / MMBtu earlier this month, and in Europe where prices rose to US $ 39.5 / MMBtu earlier. this week after the pipeline capacity auction showed no increase from Russia through the Ukrainian pipeline system or lines through Poland to northwestern Europe, according to the Financial Times.
Santos (ASX: STO) has enjoyed some of the fruits of record Asian gas prices, with the LNG exporter reporting an average realized LNG price of US $ 10.36 / MMBtu, more than double the price in the same period last year.
This allowed the company to post record sales of US $ 1.14 billion for the September quarter and was the result of the sale of 12 of the 69 LNG cargoes shipped during the quarter to the market. asian spot.
Looking ahead, the US Energy Information Administration expects US gas prices to average around US $ 5.67 / MMBtu between October and March.
Oil still waterproof
The oil inventory situation is not much better, with declines in global inventories being a clear signal that there is still plenty of room for oil prices to continue rising.
$ 100 a barrel of oil anyone?
Commercial stocks of U.S. crude are down about 6% from the five-year average this time of year to around 427 million barrels, while OECD commercial inventories in August were down 162 million. barrels compared to the five-year pre-pandemic average. Reuters reported.
The drop in inventories comes as demand for oil surged after power producers struggling to find gas began turning their power stations on to oil.
Despite this, OPEC appears to be producing below its self-imposed production cap and has resisted calls to add additional supply to the market.
Saudi Energy Minister Prince Abdulaziz bin Salman told Russian Energy Week that the oil cartel will not turn off the taps.
“We should be looking way past the tip of our nose. Because if you do that and factor in 22, you will end up by the end of 22 with a huge amount of overstock, ”he added.
U.S. shale producers have also been remarkably disciplined about their capital spending, perhaps to avoid a repeat of the last oil boom, when shale companies invested large sums to increase production, resulting in an oversupply of crude. that drove oil prices down from 2014 to 2016.
The offset, a key indicator of market tightening, between the December 2021 Brent contract and the December 2022 contract also rose above US $ 8 per barrel, the largest 12-month Brent offset since 2013 .
Japanese bank MUFG said the energy crisis was creating an oil floor of US $ 80 per barrel.
“The explosion in Brent crude over the past few trading days indicates that the trajectory [to] even higher oil prices remain firm, ”his research team noted.
It’s not just oil and gas
While oil and gas have certainly received the lion’s share of attention, coal prices have also seen remarkable price increases, with demand for solid fossil fuel also increasing.
This has given rise to companies such as TerraCom (ASX: TER) reporting earnings before interest, taxes, depreciation and amortization of $ 17.2 million in September on revenue of $ 177 per tonne of coal thanks to a strong margin of $ 101 per tonne.
However, China has signaled that it may take steps to bring coal prices back to a “more reasonable range.”