The world is awaiting an energy crisis. What is behind the rise in oil and gas prices and how long will it last?

The world welcomes the winter of 2021 in anticipation of an energy crisis. The forecast for an oil price of $120 by the spring of 2022 is turning from exotic into the mainstream, and the price of gas in Europe this week again exceeded $1,000 per thousand cubic meters and has so far fixed above this mark. The fight against rising energy prices, which spur inflation, is becoming the main topic of the international agenda of US President Joe Biden, who blames Russia and OPEC for the crisis. What is behind the rise in oil and gas prices and how long and deep will the crisis be?

What's happening

The next round of rising energy prices began in the late summer of 2021, when it finally became clear that production growth was not keeping up with the growth in demand following the recovery of the global economy.

The price of Brent oil for the first time during the pandemic exceeded $70 per barrel in early June and fluctuated around this mark until the end of August. And by mid-October, Brent was already worth $85, up 20% in two months. In total, from the beginning of 2021 until October 26 (at that time the peak price of $86.4 per barrel was recorded), oil has risen in price by 66.8%.

The forecasts grew just as quickly in autumn. If back in the summer the Brent price forecast at $100 per barrel was rather exotic , then by November investment banks and oil companies are increasingly confident about $110 per barrel by the end of 2021 and $120 per barrel by the spring of 2021.

We all watched the jumps in stock prices for gas in Europe in early September live. Gas futures at the TTF hub in the Netherlands, which since pre-pandemic times have not left the range of $170–220 per thousand cubic meters (€15–20 per MWh), rose to $300 by early June, by mid-August to $600, and on September 28 for the first time in history they hit $1,000 per thousand cubic meters. The next week showed that this was not the limit - by October 6, TTF futures had doubled in price, to $1970.

As analysts expected , this crazy figure did not last long, but it is not going to fall to the pre-crisis level either. The minimum futures price has not fallen below $800 per thousand cubic meters since then. And this week, it returned to $1,000 again on the news of Germany's suspension of the Nord Stream 2 certification, due to which gas pipeline deliveries are unlikely to begin before the summer of 2022.

This rally threatens Western countries with serious problems. Europe is facing a gas shortage, and rising prices will prevent tens of millions of people from being able to afford sufficient heating this winter. In the US, there is no such problem, but rising oil prices have driven gasoline prices to their highest since 2014 and made a decisive contribution to a 30-year inflation record .

All this not only darkens the economic picture of Joe Biden's presidency and destroys his rating, but also calls into question his megalomaniac plans for increasing budgetary spending. Since the beginning of August, Biden, in almost every speech on the topic, has called on OPEC + (that is, primarily Saudi Arabia and Russia) to revise upward the production recovery plan (now the cartel is adding strictly 400,000 barrels per month). But OPEC + is not going to listen - at all previous meetings, exporters confirmed the current plan without unnecessary disputes.

This week, after yet another catastrophic inflation statistic, Biden moved to take decisive action. In an online meeting this Monday, he discussed with Chinese President Xi Jinping the agreed release of oil from the two countries' strategic reserves. No clear deal was reported, but China, the largest net oil importer, is also concerned about the situation and has already sold oil and gasoline from the state reserve twice this year to stabilize domestic prices.

The mere news of such a discussion between the US and China sent oil down by $4 in two days. at the time the mailing was sent . By Friday evening, a barrel of Brent fell below $80 for the first time since the beginning of October and cost $78.5

How serious is it?

The synchronous jump in energy prices in recent months can be called an energy crisis, says Marcel Salikhov, director of the economics department at the Institute of Energy and Finance at the Higher School of Economics. “Surge prices are indirect evidence of scarcity in the markets, when current demand exceeds supply, so higher prices are required to balance the market,” he explains.

It's too early to talk about a full-fledged energy crisis, which is usually associated with a physical shortage of fuel and an explosive rise in prices, said Dmitry Marinchenko, senior director of Fitch's natural resources and commodities group. He considers the situation on the oil market to be normal - there is more than enough free capacity to cover growing demand, OPEC + continues (albeit not so quickly) to increase production, which will eventually help balance supply and demand, he believes.

But everything is more complicated in the gas market: several factors came together - a sharp increase in demand for LNG in Asia, and the low level of filling of European gas storage facilities since the summer, and Russia's unwillingness to increase supplies before the launch of Nord Stream 2, lists Marinchenko. As a result, the expectation of a possible shortage of gas in the winter brought prices to a record level. “If the winter is cold and Gazprom continues to restrict supplies, Europe could indeed face a gas crisis with the prospect of a physical shortage of fuel,” he warns.

Marcel Salikhov believes that gas prices in Europe will remain at high levels (above $500 thousand per cubic meter) during 2021-2022. Return to long-term average levels of $300-350 thousand per cubic meter m can be expected already in 2023-2024, he adds. “During this period, a new wave of exits of large LNG projects will begin, the reaction from demand to high prices will become more pronounced,” he said, adding that in 2022, oil prices can be expected to decline.

The Russian authorities expect the price of oil to drop from $66 per barrel (on average for 2021) to $55.7 per barrel on average for 2024, follows from the draft federal budget. However, in the event of an accelerated energy transition, there is a high probability that a price trajectory will form at a lower level in the medium-long term, the Russian Ministry of Finance emphasizes. The dollar exchange rate in 2022–2024 will average 72–74 rubles, according to the government’s forecast.

Role of Russia

Joe Biden calls the policy of Russia and OPEC the reason for the rise in oil and gas prices due to the unwillingness to speed up the unfreezing of production. for it this year It is difficult to blame Russia for the gas crisis itself in Europe - there are enough objective reasons . But European politicians have criticized Moscow, claiming it is holding back exports in an effort to speed up approval of Nord Stream 2.

Gazprom itself declares that, on the contrary, it is increasing and, moreover, not reducing supplies to Europe under long-term contracts. Back in early October, Vladimir Putin spoke about his readiness to increase supplies, including through trading on the St. Petersburg Stock Exchange.

among analysts There is no consensus about Russia's ability to quickly increase supplies. Gas production in Russia is at historical records, says Marcel Salikhov: it cannot be said that Russia limits production and thus influences the market. At the same time, domestic demand for electricity and gas is growing. “This objectively limits the possibility of a strong increase in exports, although Russia still apparently has certain opportunities to increase supplies,” the expert says.

But so far, Gazprom's European gas storage facilities remain empty or semi-empty, and trading volumes through an additional sales channel - an electronic trading platform - are insignificant, Fitch's Marinchenko states. Most likely, Moscow is trying in this way to make it clear to Europe that before the launch of Nord Stream 2, the volume of supplies will not grow, he believes. the growth of supplies to the certification of the gas pipeline . tied Vladimir Putin himself

As for oil, the fact that OPEC+ is not accelerating production growth is more about economics than politics, says Marinchenko. “The situation with demand is not so clear-cut, it may slightly decrease in January-February, and shale oil production has almost recovered to the level of 2019. Under these conditions, OPEC + is still being cautious,” he explains.

Consequences

High oil and gas prices are good news for the Russian economy and Russian energy companies. Their contribution to the additional growth of Russia's GDP can be estimated at 1–1.5 percentage points, Salikhov believes. The Russian government expects the economy to grow by 4.2% in 2021 after falling by 3.1% in 2020. In January-September 2021, the annual GDP growth, according to the Ministry of Economic Development, amounted to 4.6%. But in the fourth quarter, the agency expects annual GDP growth to slow to about 3% amid a higher base at the end of 2020. However, the Russian economy will not be able to maintain high recovery growth rates for a long time: as early as 2022, as S&P economists predict , annual GDP growth will drop to 2.6%, and then to 2%.

In the world economy, the crisis in the energy markets will lead to a redistribution of funds from consumers to energy producers, which should not have a strong negative effect on global GDP, Salikhov believes. Against the backdrop of a low base in 2020, the recovery growth rates of countries importing natural resources may be lower than expected, said Dmitry Kulikov, director of ACRA's sovereign ratings and macroeconomic analysis group. “From the point of view of the impact on the global economy, a more serious problem is inflation, which is fueled by high energy prices,” Salikhov stressed.

What's next

After the news of the talks between Joe Biden and Xi Jinping, oil fell below $ 80, but the effect of this weapon is limited, notes Bloomberg - in the end, in response to the agreed release of strategic reserves of the United States and China, OPEC + can simply reduce the recovery of its production. “OPEC+ countries are ready to confront the US and Europe because now consumers do not have any serious leverage with which they can influence the situation — the US shale industry has changed quite a lot and is focused on ensuring profit growth rather than increasing production,” says Marcel Salikhov.

At the same time, analysts interviewed by The Bell are confident that in 2022 the price of oil will begin to fall. “The OPEC+ countries have enough price of $60-70 to balance the budget. Keeping the price at $80 may not be easy. It is more likely that next year, when supply catches up with demand and the market is in a state of balance, prices will drop slightly,” Marinchenko said.

But the energy crisis of 2021 (which will clearly move into next year) will not be the last, predicts Bloomberg: apparently, these are the inevitable economic costs of an energy transition that will stretch over several decades. The main reason will be the underinvestment in traditional energy capacities, including gas, in accordance with ESG mandates, and the outpacing growth of solar and wind power plants (with their inherent failures in generation) without adequate backup. Until a reasonably convenient way to store electricity (battery farms are not up to the task yet, hydrogen energy is in its infancy) and in the face of growing energy demand, this is a sure recipe for supply crises.