The world’s attention has of late been focused on fluctuating oil and gas prices. Expectations are that prices will increase in the near future, owing to a number of factors. Primarily, however, experts say the situation in the Middle East could be a major factor as supply lines of oil and gas to Europe could potentially be interrupted.
Factors affecting oil and gas prices
While it is difficult to predict price changes in the next stage, the following factors could play a major role:
US Treasury bonds
First, US bond yields are continuously rising in an attempt to control inflation. 10-year bond yields rose to their highest level in 16 years (since 2007) by 11 basis points. This led to investors searching for safety in gold and a slight decline in the energy sector. This was evident in the rise in global gold prices. Thus, gold rose by about $160 over the past two weeks and reached its highest level in 13 weeks.
Fear of interruption of supply chains
The second factor is the security situation in the Middle East and concerns regarding supply disruptions. The Middle East has nearly a third of the world’s oil supply.
Although Israel does not have large gas reserves, it stopped production in the Tamar gas field due to the security situation. This has limited gas flows to Egypt, which re-exports it by sea, often to Europe.
In addition, attention is turning to the security of the Strait of Hormuz. It is a strategic strait through which about 20 percent of global supplies are transported. That is the equivalent of 30 percent of the total oil transported by sea.
Europe enters its second winter
Third, the European Union is entering its second winter since the outbreak of the Ukrainian-Russian war. It is fearful of rising demand amid supply rationing, which may raise global gas and fuel prices.
The fourth factor is the possibility of the United States imposing more sanctions on Iran, as it supports Hamas. This could reduce Iranian oil production by one million barrels per day, raising prices to $140 per barrel next year.
Lifting Venezuela’s sanctions
Hopes were up following the lifting of US sanctions on Venezuela and after reconciliation between the opposition and the government. However, this step failed to affect the movement of oil prices. The possibility of increasing Venezuelan production in the oil markets is limited and has not exceeded 200,000 barrels per day. This amount is not sufficient to meet the market need. Therefore, oil prices continued to increase last Friday despite the return of Venezuelan production to the markets. Brent crude oil recorded its highest levels this month, with prices reaching $93.28 per barrel, an increase of 0.97 percent.
OPEC+
The fifth and final factor relates to OPEC+ continuing to restrict its oil production. Saudi Arabia, among other members, is unlikely to accept lower oil prices after they fought hard to support the price. President Vladimir Putin confirmed, during Russian Energy Week, that “coordination with Saudi Arabia and OPEC+ regarding oil production continues. It is important for the predictability of the oil market. We consider the security events in the Middle East and the extent of their impact on supplies and demand.”
The OPEC+ alliance includes the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia. OPEC+ extracts about 40 percent of the total global crude oil production.
All of the factors above may affect the fluctuation of global oil prices. However, what can be confirmed is that prices will stabilize in a range between the mid-eighties to the mid-nineties. This range is still acceptable for both producers and consumers. That is unless any other change to the factors mentioned above occurs.
Read: Oil prices decline, analysts express optimism regarding supplies
Europe’s preparations for winter 2023
Going back to Europe, it is preparing to officially enter the winter season with the transition to winter timing. In the last few days of October, Europe moved back its clock 60 minutes.
European natural gas prices resumed their increase amidst growing concerns regarding the ongoing conflict in the Middle East during winter.
Future standard contracts in the continent rose by about 6.1 percent after the gains recorded by oil. Although a slight loss is expected on a weekly basis after the recent declines, prices are still about 35 percent higher than they were before the recent events in the Middle East, according to Bloomberg.
The European Union had previously exceeded the target of filling gas tanks, estimated at 80 percent, to 90 percent. That is an increase of 6 percent over the last year (its gas stock reached 84 percent in 2022). However, this quantity is still insufficient, and it only allows Europe to withstand for 3 months. Therefore, European countries are betting on the United States, Norway, Algeria, and Qatar to keep Europe warm long-term. However, it is risky given that most countries are preoccupied with the war in the Middle East.
Germany’s vulnerability
Germany is the main reason EU countries look for alternatives, including coal factories. It is the largest economy in Europe and one of the largest importers of Russian gas in the continent. However, Germany is the most vulnerable to supply disruptions. Recently, it has reactivated three coal-fired plants to ensure energy supplies this winter. According to the German authorities, these factories, affiliated with RWE AG and LEAG, will be available to meet demand. That is especially true during peak times when power outages may occur.
Since last April, the country has no longer had a backup source to cover the outages of renewable energy sources. The government issued a decision to close the last nuclear reactors that were still in operation. This limited energy alternatives and affected the security of the power supply. Additionally, it hinders the decarbonization goals that Germany seeks to achieve by 2030.
In the same context, the gas pipeline from Russia to Germany (Nord Stream) is another source of concern. After gas through Nord Stream stopped completely last September, more sanctions were imposed on Russia.
This line opened in 2020 and is 77 kilometers long connecting Russia and Germany. It was vandalized last year.
On the other hand, domestic gas consumption in Germany jumped at the end of September last year to the highest level since March. That was due to a cold wave. Demand rose to about 14 percent higher than the 4-year average (2018-2022). This means that Germany must adopt a strict policy for energy use this winter.
Italy secures new supply source
Italy also turned to Qatar to secure new supplies of gas for heating in the winter. Two companies affiliated with Qatar Energy and the Italian company Eni signed an agreement, in which it is stated that Qatar will export up to one million tons of liquefied natural gas annually to Italy.
This is a long-term contract for a period of 27 years. However, the supply of liquefied natural gas shipments will not begin before 2026.
This is the third agreement this month signed by Qatar to supply liquefied gas to Europe. It announced a similar agreement with Shell to supply up to 3.5 million tons annually to the Netherlands.
Qatar Energy also signed a long-term agreement with the Japanese company Marubeni Corp to supply naphtha. The company will supply up to 1.2 million tons of naphtha annually starting October 2023. Earlier, it signed two agreements with Total Energy to supply 3.5 million tons annually of liquefied natural gas to France. The contract is for a period of 27 years.
France in slightly better position
Meanwhile, the CEO of Electricité de France, Luc Raymond, reassured that energy production from nuclear plants in France is improving. There is no need to worry about energy supplies next winter as France is heading into next winter calmly.
However, EDF’s production from nuclear plants declined by 23 percent last year, to 279 terawatt-hours. This is the lowest level since 1988 since reactors were shut down for inspection and repair due to pressure corrosion.
This exacerbated the energy crisis in Europe and increased electricity prices. The French facility was forced to buy electricity from wholesale markets to cover shortfalls, which cost it 29 billion euros.
Therefore, despite reassurance from Raymond, fears remain strong that the 2022 blackout scenario will be repeated.
Final words
In conclusion, winter 2023 will not be easy in terms of the global energy market as well as oil and gas prices. Rather, it may bring surprises that will be directly reflected in the economies of the entire world. Will we emerge from the winter of 2023 grappling with a global economic crisis similar to the Covid-19 pandemic?
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