The latest leg higher in prices was triggered by Monday’s decision of the central bankers of the oil market to increase output levels by 400,000 bpd in November, as previously agreed, and not by more as requested and even demanded by some consuming nations. It was this development that propelled oil prices to levels not seen since 2018 in Brent and Gasoil and to the highest since 2014 in WTI, Heating Oil and RBOB.

It would be, however, foolish to think that this step was solely responsible for the recent strength. The merciless rise in natural and LNG prices are as much, if not more, guilty for the jump as perceived and continuous drawdown in global oil inventories in the last quarter of the year. The reasons for the unprecedented bull run in gas prices are well publicized: low stock levels, insatiable thirst for LNG from China and Europe, operational issues at export terminals, constrained Russian exports to Europe and fears of another cold winter north of the Equator. The ascent is truly eye-catching. UK natural gas futures for November delivery touched $4/therm yesterday. It was below 40 cents/therm in March. The Dutch Gas futures contract rallied to €160/megawatt before falling. It has increased almost 10-fold in value since the beginning of the year. The front-month NYMEX natgas contract came within whisker of its 7-year high of $6.5/mmbtu yesterday before correcting sharply.

It is this support that could be withdrawn soon. After fresh record highs in the morning all over the world prices came crashing down in the afternoon. The reason is simple. The most influential gas producer, Russia, that was partly responsible for the astronomic price rise might change course. According to its president the country’s gas exporter, Gazprom, is boosting supplies to Europe although he was quick to point out that it was economically unbeneficial to ship gas through one of its traditional routes, Ukraine. It is not entirely clear how much extra volume Russia is intending to send to Europe therefore volatility in the foreseeable future is guaranteed and renewed price rise cannot be excluded. Yesterday, nevertheless, CME natgas fell more than 12% from the day’s high and on ICE the retracement was an unbelievable 33%.

If the Russian intention was to showcase its influence on the European and global gas market it has been successful in doing so.  In case this demonstration of quasi monopoly will not be followed through the energy crunch will not be alleviated and could even get worse. As briefly mentioned in Monday’s note danger is lurking from North Africa, too.  On August 24 this year Algeria cut diplomatic ties with Morocco and three days later Morocco closed its embassy in Algiers. The latest chapter in the book of simmering tensions was opened by Algeria’s support of the Polisario Front, which fights for the independence of Western Sahara, a territory over which Morocco claims sovereignty. One of the consequences of the break down in diplomatic ties was that Algiers has announced halting gas deliveries to Spain and Portugal via the Maghreb-Europe pipeline that runs through Morocco after the pipeline contract expires at the end of this month. The gas pipeline has a capacity of 12 billion cubic meters per year. Natural gas deliveries from Algeria to Spain and from there to Europe will continue unabated via the Medgaz pipeline that bypasses Morocco, according to the Algerian energy minister, nonetheless, the disruption will do nothing to ease supply shortage. Natural gas will remain in the focus of the energy market.

Calling for a top?

It has been evident in the past few weeks and even more so after yesterday’s frantic trading session that oil is partly driven by natural gas. Yesterday’s correction, however, was not exclusively the function of falling gas prices – a disappointing weekly report on US oil inventories is to be blamed, too. For the second consecutive week, nationwide crude oil stocks rose, this time by 2.3 million bbls, bringing the combined fortnightly build to 7 million bbls. It appears that the damage caused by Hurricane Ida has been mended. Crude oil production rose to 11.3 mbpd and net import increased by 1.1 mbpd to 4.9 mbpd, the highest reading since July last year. We suspect this is the result of refinery buying in the immediate aftermath of the hurricane.

The 1.5% rise in refinery utilization also implies that the industry has shaken off the Ida impact. The increase in runs resulted in a 3.3 million bbls growth in gasoline stocks also helped by rising imports that stood around 1 mbpd last week. With the approaching winter season, distillate inventories got 400,000 bbls thinner and they show a 6.1% deficit to the 5-year average. Total commercial oil inventories climbed a little, but they are still well below last year’s level (-13.1%) and the mean of the comparable weeks in the past 5 years (-4.9%). Proxy demand is healthy. In total, refiners supplied 21.52 mbpd of product, 9.43 mbd of which was gasoline and 4.37 mbd distillates. It serves as a reminder that the demand side of the oil equation is healthy despite the correction we experienced yesterday.

The final nail was hammered into the bulls’ coffin by the US energy secretary, Jennifer Granholm, who, as reported by the Financial Times, claimed that “all tools are on the table” to tame rising oil prices including SPR release or crude oil export ban. (The practice of reining in crude oil exports in order to influence prices is conspicuously less anti-competitive in the US than, say, in OPEC countries.) Clearly, the price pain threshold of the US administration has been reached. No surprise that WTI is getting relatively weaker to Brent this morning. In case her words are put into action Goldman Sachs sees a $3/bbl downside risk to its $90/bbl end-year price target. If Russian gas export will, in fact, be increased the additional oil demand created by the gas-to-oil switch will evaporate and under this scenario the highest price of 2021 might have been achieved yesterday. But this is a big “if”.