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Energy markets could be heading towards a new crisis

Oil markets
By Paul Hodges on 10-Sep-2023

It’s too soon to talk of an energy crisis. But as the charts showing Brent oil and European natural gas prices confirm, it is certainly time to start worrying about one for the winter:

  • OPEC+ has reduced oil output yet again, and prices have begun to move out of their summer range
  • Strikes at 2 Australian LNG (Liquefied Natural Gas) terminals are impacting 5% of global LNG supplies

The key move so far has been in oil markets with Russia/Saudi Arabia’s decision to extend their own output cuts to the end of the year. Their move came on top of the output cuts agreed by several OPEC members in April.

It was then followed by strikes over pay and conditions at Chevron’s Gorgon and Wheatstone LNG terminals in Western Australia. These supply Asian markets.

The risk, of course, is that the strike has a knock-on impact in Europe, where Russian gas supplies have been sharply reduced as a result of the war.

As always with energy markets, the main issue is geopolitics.

As the chart shows, OPEC reduced output in 1973 to increase prices. Prices jumped from $2/bbl in 1972 to $12/bbl in 1974. And then they jumped again to $36/bbl in 1980 after the Iranian revolution and US hostage crisis.

In today’s money ($2023) this meant prices soared from $15/bbl in 1972 to $61/bbl, and then to $115/bbl. Inevitably, as the chart also shows, the world went into a deep recession in 1973/4, and then into a double recession between 1980/2.

Inflation took off, stock markets crashed, and oil shortages led to long queues at gasoline stations. And the chaos multiplied as governments lost control of events.

In the UK, for example, a coal miners strike led to a 3-day week for industry and domestic power cuts in the winter of 1973/4.

History, of course, often repeats – but it doesn’t rhyme as the famous author, Mark Twain noted.

Today, the potential energy crisis includes natural gas as well as oil.

As the IEA chart shows, Europe doesn’t have enough gas storage to survive a hard winter. Instead, it used to rely on Russian pipeline supplies, which are now much reduced:

  • Its storage is now full but even a ‘normal winter’ will require limited Russian supply, and major LNG imports
  • A ‘cold winter’ will require a high level of LNG imports to balance demand and avoid major cutbacks in Q1

And, of course, Europe isn’t the only region looking to buy LNG. China has taken 30% of all LNG contracts in the past 5 years. And as Bloomberg reported, Beijing has been encouraging:

“State-owned buyers to sign long-term contracts and even invest in export facilities, in order to bolster energy security through the middle of the century”.

A further complication is that Russia and OPEC have political as well as economic objectives:

  • Both Russia and OPEC want to maximise their income from energy sales
  • Russia also wants to reduce US pressure on Ukraine, and both want to slow moves towards renewables
  • As in 1979, both probably believe that a Republican president would be more sympathetic to their cause
  • The recent Republican candidate debate certainly seemed to support this analysis

Essentially, the geopolitical strategy is repeating Iran’s approach in 1979/80. It held the US hostages through the US election period to pressure the Democrat, President Carter. And they were only released on the day that Republican President Reagan took office.

It’s too soon to talk of an energy crisis. But as the charts showing Brent oil and European natural gas prices confirm, it is certainly time to start planning for the possibility: Oil prices have recently risen 25%. And Europe risks gas shortages if there is a cold winter.