The oil prices are trading at seven-year highs after OPEC and its allies decided to continue their gradual approach to restoring output slash during the pandemic. The decision to add only 400,000 barrels per day in November remains in line with OPEC plus established a schedule of adding back that amount of oil every month until the restoration of deep cuts made in 2020 to support the prices during the depth of the pandemic recession. The cautious increase comes amid stronger demand for oil products like gasoline and jet oil as COVID-19 restrictions ease the world over.
Furthermore, unusually high natural gas prices have accentuated supply concerns with growing demand from some electricity producers in Asia, who have been forced to switch to oil-based products. These concerns of escalating demand and the face of dwindling supplies have forced crude prices to seven-year highs on the New York Mercantile Exchange and three-year highs on Brent.
Meanwhile, natural gas prices have been on a tear reaching record highs in Europe and a seven-year high in the United States. Last month, prices gained which followed the trend of the last seven months has been triggered by rising demand for coals cleaner alternative. Winter in the Northern Hemisphere, rising gas imports from China and Brazil have triggered higher demand with suppliers struggling to keep up.
Furthermore, European natural gas inventories are at a decade low and with no global cartel coordinating gas supplies, the natural gas demand and supply gap is bound to worsen leading towards winters. That is what the markets are fearing. These fears have brokers telling the world's top commodity trading houses to deposit hundreds of millions of dollars in extra funds to recover or cover their exposure to natural gas prices.
To discuss if anything can stop this upward trajectory in oil prices and if not, how high the prices can go, CNBC-TV18 caught up with energy economist Roberta F Aguilera and to talk about the supply dynamics at play for natural gas and the price trajectory of that commodity going forward, the channel caught up with Michael Stoppard, chief strategist of global gas, IHS Markit.
According to Aguilera, the analysts and commentators are getting a bit carried away and that there has been some disappointment with the outcome of the OPEC plus meeting but it's important to remember that that's what they had agreed to previously and if they find that the market is too undersupplied and prices start to go up, there is time for them to reassess in the coming months and maybe lift quotas at that time.
Aguilera is of the view that in terms of prices, we have probably already seen the high, "For the rest of the quarter, I would imagine a range closer to $70 to $80 a barrel because on the supply side, there have been disruptions in particular from the US, the Gulf of Mexico after the hurricane, and that's starting to come back. Also, the demand recovery is happening after COVID but it's delicate, we know that new waves of the virus can very suddenly slow down growth considerably. And OPEC plus is coming back although steadily, and I suspect they will reassess month after month and not let prices escalate to too high of a level."
When asked about the demand picture, he said, it is recovering no doubt but some analysts are perhaps overstating the demand increase that will come from fuel switching into oil in the electricity generation sector. It's a very small limited market and anyway, the higher prices for crude oil that we are seeing now make that less attractive.
On gas prices, Stoppard said the surge in natural gas prices is quite dramatic, we are looking at $35 per million MMBtu in both Asia and Europe. Putting that in perspective, in oil terms, we are at $200 a barrel, maybe higher. So these are eye-popping prices that we are seeing in the natural gas market.
Giving reasons for this surge in prices, he said there is clearly a double hammer blow that we are looking at as the restrictions of COVID-19 fall away we are seeing demand sprinting ahead and supplies limping. This is true of many commodities, and we are seeing it across the energy space, but it's particularly true in the gas space, he added.
On prices, he said it is going to be a tight winter and doesn't see relief anytime soon for gas prices, "We expect prices to remain strong, at least through Q4 and then depending upon the winter weather, we may then when we get into the beginning of 2020 to be able to rely more on storage inventories if they are sufficient to use in the January to February. However, in the meantime, there are very few levers and that is what is encouraging the balls and concerning people that there are a few restraints in this market."
"In the international markets where we are at $30-$ 35 per million MMBtu, If you are referring to the US markets where we are going $5-$6, I don't see much upward progression in that market because that is feeding as much as possible gas into the international market and so it's not going to connect up further with the international prices.
For the full interviews, watch the accompanying video