Global energy prices are spiking on a tight global gas market ahead of winter, pushing Brent above $78 per barrel (/bbl), a three-year high helped by falling distillate stocks in EMEA and rising crack spreads, a report said.

Depleted global gas inventories after last year's cold winter have played a role in pushing global gas prices to record levels, said the latest BofA Research report.

But the tighter gas markets have also come on the back of increased global gas demand due to low hydro, low wind, and a booming industrial sector in many parts of the world. Rising LNG volumes at sea have failed so far to balance the market ahead of the 2021/22 winter.

But the run up in gasoil prices started off with surging global trade and lower supplies, as refiners focused on gasoline production this summer. Now, just as global airlines prepare for a US reopening, a cold winter could push diesel past $120/bbl and Brent past $100.

Beyond the weather issues, underinvestment remains a theme in commodities, driven by a lack of investor appetite for conventional energy. Investors are simply wary of the poor investment returns of the past decade and green climate policies of the upcoming one. As a result, tight energy markets could persist for a number of years until the planet transitions to a green energy economy.

While increased non-Opec+ supply (see Non-Opec+ back in the saddle again) should help ease energy markets in 2022, a multi-year run up in crude oil prices is now in the cards. Note that these tighter physical markets have appeared just as monetary and fiscal policy is stretched to the limit.

Even if the aggregate loss in total OECD real GDP has been around $12tn during Covid-19, roughly the same GDP crisis in dollar terms that we saw in 2008/9, exports and industrial production have zoomed to record levels thanks to stimulus.

“To put it into context, we now estimate that G20 discretionary fiscal stimulus and M2 growth during Covid-19 is 4.6 and 3.3 times respectively the levels seen during the Great Recession,” the report said.

Because consumers are still spending this stimulus money aggressively, global exports as reported by the IMF recently jumped to a monthly record of $1872 billion, tightening many commodity markets around the world. In turn, the run up in energy and goods prices has led to a surge in US CPI inflation past 5% in the past few months.

“Will inflation keep rising from here? And if so, what could be the macro impact? Looking back at an analysis that we first put together in 2008, we note that energy as a share of GDP has risen to 5.6% so far, still far from the critical level of 8.8% observed in 2008,” said the BofA Global Research report.

The report notes that

(1) gas to oil substitution could reach 1 to 2 million b/d if gas prices keep rising,
(2) a cold winter could add 500,000 b/d of oil demand, and
(3) increased air traffic as the US reopens could add 300-500 thousand b/d of incremental demand in 1Q22.

If all these factors come together, oil prices could spike and lead to a second round of inflationary pressures around the world. – TradeArabia News Service