A winter of high prices

05 October 2021

Gromov Alexey I. Principal Director on Energy Studies, Head of the Energy Department
Тип: Analytics

The magazine "Oil and Capital" published an expert opinion of Alexey Gromov, Principal Director on Energy Studies at the Institute for Energy and Finance, on the possible timing of the end of the global energy crisis and its economic consequences.

In any case, by the end of 2021 and in the first quarter of 2022, world energy prices will be high

The current energy crisis is similar to a perfect storm. A number of factors coincided.

First, energy demand has recovered much faster than expected. The economy has recovered, and the energy sector, amid deferred investment decisions, was not ready for this.

Second, the gas market became a kind of catalyst that triggered a chain reaction of price increases in the global energy market. The situation was warmed up by China and the gas market of the Asia-Pacific region as a whole. As known, the volumes of LNG, both under long-term contracts and on the spot, are primarily sold in the premium market of the Asia-Pacific region, and the European market is the “closing one” for LNG - it receives volumes that are not demanded in Asia. In fact, there was a domino effect when the high demand for gas in the Asia-Pacific region dispersed the prices for LNG and exhausted all available volumes of LNG on the market, providing conditions for the emergence of an LNG shortage already in Europe and a corresponding increase in spot prices on the European gas market.

At the same time, after the disastrous year in terms of global demand for hydrocarbons in 2020, Russia was not ready to quickly get involved in the situation.

Yes, of course, Gazprom is fulfilling all its obligations under long-term contracts, but the Russian company has difficulties with promptly increasing supplies in excess of contractual obligations.

Thus, unlike last year, all our European partners are now taking gas to the maximum within the framework of existing long-term contracts with Gazprom, and Gazprom does not have many real opportunities for quick maneuver with additional gas supplies to the European market.

At the same time, we note that Gazprom's supplies to Europe over the past eight months have grown significantly compared to the previous “disastrous” year in terms of demand, but they still do not reach the level of 2019 (-19 billion cubic meters compared to the same period in 2019). In fact, this is the reason for the main claims of European officials against the Russian gas company, who believe that Gazprom is able to supply more gas to Europe, but, in their opinion, is now deliberately not doing this, trying to accelerate certification and commissioning of its new gas pipeline "Nord Stream-2".

But in reality, the situation is more complicated. Gazprom needs to prepare for the peak of the winter heating season in Russia and fill Russian UGS facilities. And all this must be done in a situation of high current demand for gas both in Russia and in Europe.

In addition, it is unclear to what extent Gazprom is able today to quickly transfer gas flows within the framework of the unified gas supply system (UGSS) from one corridor to another. The main reserve production capacities of the company, which can be launched relatively quickly, are located in Yamal, which is oriented towards the northern gas transmission corridor serving northern streams. And the central supply corridor goes through Ukraine. But it is not clear to what extent Gazprom can and is ready to promptly redirect gas from Yamal to this direction.

Unfortunately, so far there are no signs that the global energy crisis will end quickly. Much will depend on the weather.

If Europe and Asia are facing a cold winter, the energy crisis will not abate. Prices on stock exchanges will remain or will be even higher. If the winter turns out to be mild, the rush in demand for hydrocarbons will subside. In any case, by the end of 2021 and in the first quarter of 2022, world energy prices will be high. And if Russian exporters want to take advantage of this, they must act quickly.

China quite unexpectedly faced a shortage of not only gas, but also coal, which also put pressure on international markets. An imperfection of the domestic energy markets in the country affected.

In terms of the green agenda, from the point of view of the economy, solutions on how to minimize such risks in the future will be developed. It will apparently concern additional fuel reservation and the creation / expansion of corresponding storage capacities, as well as the further development of technologies for energy storage systems, etc. At the same time, from a global point of view, no one will abandon the green agenda. Moreover, amid the current energy crisis in Europe, on the contrary, the positions of the green movement are only strengthening. This, by the way, was clearly demonstrated by the results of the recent elections to the German Bundestag.

In this situation, the scenario that the leading energy agencies are talking about is quite likely, when, under the pressure of unprecedentedly high gas prices, many consumers will use temporary energy supply schemes based on significantly cheaper fuel oil, which, in turn, may "warm up" world prices for oil, risking to rise above $ 90 per barrel by the end of the year.

And, paradoxically, for us, as hydrocarbon producers, this is not very good in the long term, since high prices for some energy sources stimulate consumers to switch to others.

Thus, if producers do not take any action to cool the oil market, renewable energy sources will receive a powerful impetus for development, and this can significantly accelerate consumers' refusal from hydrocarbons in the future. In this context, the coordinated actions of OPEC + are important. I think that we should not wait for the first quarter of 2022, but now start discussing the lifting of restrictions on oil production by OPEC + countries in order to calm the situation. Russia, for example, has little interest in maintaining restrictions on oil production inside the country and will only welcome such a position of OPEC +.

Also, do not forget that the rise in world oil prices may put pressure on the domestic market of oil products, the prices of which are also ready to rise again. And the Energy Ministry needs to think again what mechanisms to use to prevent this. So far, all the prerequisites for the growth of prices for gasoline and diesel are available, but no one would like this, since for our country this is another "acceleration" of inflation and an increase in socio-economic tension.

Gromov Alexey I. Principal Director on Energy Studies, Head of the Energy Department
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