Gas prices explode – and oil prices will follow

After gas prices hit new highs, Brent crude oil prices have broken through $80 a barrel for the first time in almost three years.

Brent crude oil prices have broken through $80 a barrel for the first time in almost three years. Oil’s rally comes as soaring European gas and coal prices presage a winter energy crisis. In September 2020 “in Europe it cost €119… to buy enough gas to heat the average home for a year”, says The Economist. “Today that figure is €738.” 

A cold European spring and a hot Asian summer, combined with a post-pandemic industrial rebound, have kept demand high. Imports of US liquefied natural gas (LNG) on ships will help ease the pressure a little, but global gas markets depend mainly on pipelines and are only “imperfectly linked”. 

Denting the global recovery

“Gas storage tanks in Europe are only 72% full ahead of the winter season, compared with the usual 87% at this time of the year”, Warren Patterson of ING tells Pierre Briançon in Barron’s. The global recovery, which was already “weakened by the Delta coronavirus variant, will take another hit”.  

The crisis may yet ebb, says Kieran Clancy of Capital Economics. A mild winter in the northern hemisphere and the long-delayed approval of Russia’s Nord Stream 2 pipeline to Germany could restore balance to the market. That said, even then prices are still likely to remain elevated until at least spring next year.  

“Hope is not a policy”, says John Kemp for Reuters. Governments are stepping in. Italy plans to spend €3bn on cushioning the blow to consumers. The trouble is that protecting householders from rising prices will only mean a bigger hit to industrial users, which could “disrupt supply chains and create shortages elsewhere in the economy… There is a limited global supply of gas [and it] must be rationed”. In Britain and elsewhere “residential and commercial customers” could do their bit by “turning down their heating this winter”.  

Extra demand for oil 

High natural-gas prices are having knock-on effects in other energy markets, says Julian Lee on Bloomberg. In Europe and Asia it is now “cheaper to burn oil than gas to generate electricity”. Oil trader Vitol Group predicts that such “fuel switching” will produce an extra “half a million barrels a day” in global oil demand this winter. The reopening of US borders to EU and British visitors also heralds a recovery in the long-haul aviation market, providing another tailwind for oil. Oil has staged a “remarkable recovery” since US prices went negative in April last year, says Matt Egan for CNN. Goldman Sachs, which has long been bullish on the fuel, now forecasts Brent crude will “hit $90 a barrel by the end of the year”. 

Europe’s energy woes are spreading worldwide, says Stephen Stapczynski on Bloomberg. Even an average northern-hemisphere winter is likely to bring further price hikes. Soaring LNG prices will mean higher prices for Chinese-made steel and aluminium. “Economies that can’t afford the fuel – such as Pakistan or Bangladesh –could simply grind to a halt”. Long focused on oil prices, traders are “likely to learn how much the global economy depends on natural gas” this winter. 

Recommended

Share tips of the week – 7 October
Share tips

Share tips of the week – 7 October

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
6 Oct 2022
China’s economy is heading for a sharp slowdown
Chinese economy

China’s economy is heading for a sharp slowdown

With a slowing property market, Covid lockdowns sapping growth and the CSI 300 stock index down by 22% this year, China’s economy is in trouble.
6 Oct 2022
5 of the world's best stocks
Share tips

5 of the world's best stocks

Concentrating on a few highly profitable companies that excel in their fields can reduce the overall risk in your portfolio, says Rupert Hargreaves. H…
6 Oct 2022
The dangers of derivatives as the “Goldilocks era” ends
Investment strategy

The dangers of derivatives as the “Goldilocks era” ends

That this is no longer a benign environment for investors, says Andrew Van Sickle. But – as the recent pension-fund derivatives blow-up shows – not ev…
6 Oct 2022

Most Popular

Should you take a 25% tax-free pension lump sum in instalments?
Pensions

Should you take a 25% tax-free pension lump sum in instalments?

Taking out a 25% tax-free lump sum sounds appealing but it might not be the best way to manage your pension
30 Sep 2022
Markets may have bounced, but this is not the end of the bear market
Stockmarkets

Markets may have bounced, but this is not the end of the bear market

Stocks are back on the rise, commodities and precious metals prices are up – even the pound has rebounded. But none of this is typical of bull markets…
5 Oct 2022
October’s Premium Bonds: how to check if you are a winner
Savings

October’s Premium Bonds: how to check if you are a winner

NS&I has added almost 110,000 more prizes to October’s Premium Bond draw – are you a winner?
4 Oct 2022