Power Up: Shrinking oil and gas inventories point to more price pain
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So those high oil and gas prices – at multi-year and record highs respectively – that you have been shaking your head about? Well, it looks like they are going to keep climbing for some time to come.
Inventories of both fossil fuels continue to dip with OPEC and US shale producers appearing to be in no rush to open up the crude pumps while supplies of gas remain tight.
In the US, gas production has recovered far more slowly than consumption with Reuters noting that gas drillers have remained cautious while the economy rebounded.
This has sent gas inventories swinging from a large surplus to the pre-pandemic five-year average in the second half of 2020 to a deficit by the end of the second quarter of 2021.
In fact, working gas inventories in underground storage are currently at their lowest level since 2018.
While this deficit is not nearly as bad as the situation in Europe and Asia, it has not been helped by rising LNG exports to Asia and Europe and the slow recovery in gas drilling and production, a combination that has sent US domestic gas prices climbing to more than US$5 per million British thermal units, up from about US$2-$US3m.
This still pales in comparison to prices in Asia, which hit a record of US$50/MMBtu thermal units earlier this month, and Europe where prices rose to US$39.5/MMBtu earlier this week after the pipeline capacity auction showed no increase from Russia either through the Ukrainian pipeline system or lines passing via Poland to north-west Europe, according to the Financial Times.
Santos (ASX:STO) has enjoyed some of the fruits of the record high Asian gas prices with the LNG exporter reporting an average realised LNG price of US$10.36/MMBtu, more than double the price at the same time last year.
This allowed the company to post a record US$1.14bn in sales for the September quarter and was the result of selling 12 of the 69 LNG cargoes it shipped during the quarter to the Asian spot market.
Looking ahead, the US Energy Information Administration expects US gas prices to average about US$5.67/MMBtu between October and March.
The oil inventory situation is hardly any better, with global inventory drawdowns a clear signal that there’s still plenty of room for oil prices to continue rising.
US commercial crude inventories were down about 6% from the five-year average at this time of the year to about 427 million barrels while OECD commercial stocks in August were down 162 million barrels from the pre-pandemic five-year average, Reuters reported.
The fall in inventories comes as demand for oil grew after electricity generators struggling to find gas started firing up their oil-powered plants.
Despite this, OPEC appears to be producing below its self-imposed production ceiling 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 would not turn the taps up.
“We should look way beyond the tip of our noses. Because if you do, and take ’22 into account, you will end up by end of ’22 with a huge amount of overstocks,” he added.
US shale producers have also been remarkably disciplined about their capital expenditure, perhaps to avoid a repeat of the last oil boom, when shale companies had invested large amounts into increasing their production, leading a crude oversupply that sent oil price tumbling in 2014 to 2016.
Backwardation, a key indicator of a tightening market, between December 2021 Brent contract and the December 2022 contract has also jumped to above US$8 per barrel, the steepest 12-month Brent backwardation since 2013.
Japan’s MUFG Bank said the energy crunch is carving out an US$80/bbl oil floor.
“The blowout in Brent crude timespreads in recent trading days signals that the pathway [to] even higher oil prices remains firm,” its research team noted.
While oil and gas have certainly taken the lion’s share of attention, coal prices have also seen some remarkable price rises as demand for the solid fossil fuel also increased.
This has resulted in companies such as TerraCom (ASX:TER) reporting earnings before interest, tax, depreciation, and amortisation of $17.2m in September on revenue of $177 per tonne of coal thanks to a solid $101 per tonne margin.
However, China has flagged that it may take steps to bring prices of coal down to a more “reasonable range”.