“Even if they are often affected by the same economic events”, gas and oil “are very different markets”, explains to AFP Alex Munton, of the Rapidan Energy group. (Photo: 123RF)
London — In the midst of the energy crisis, Europe is suffering from soaring gas prices, when those of oil finally seem to slow down, these two markets which seem to be closely correlated now taking opposite directions.
“Even if they are often affected by the same economic events”, gas and oil “are very different markets”, explains to AFP Alex Munton, of the Rapidan Energy group.
In a common momentum caused by the Russian invasion of Ukraine, the two oil benchmarks had reached the highest peaks seen since the 2008 financial crisis in early March, while European natural gas peaked at its historic price record.
Since then, record levels of inflation and fears of recession have cast a chill over prices, notably risking destroying demand.
The two global crude benchmarks saw their first monthly price drop in June for 2022. North Sea Brent has lost almost 10% and its US counterpart WTI more than 16% since June 1.
But on the gas side, fears of supply disruptions have been front and center for weeks.
Over the same period, the benchmark European natural gas price, the Dutch TTF, jumped by more than 90%.
“The world was really (…) deluded into believing that the supply was abundant and that gas prices would remain very low”, affirms Alex Munton, assuring that the speed with which the market tightened at the end of 2021 , amid geopolitical tensions between Russia and the West, was a big surprise.
“Structurally inflationary”
Russia supplies regarding 40% of European gas imports.
“It is therefore not surprising that it has started to blackmail this market,” says Georgi Slavov, analyst at Marex.
If the European Union has agreed on a 90% reduction in its imports of Russian crude by the end of 2022, “it is much more difficult to stop Russian gas, because the construction of new gas pipeline infrastructure takes years”, argues Mr. Slavov.
Europe finds itself trapped by its dependence on Moscow. Bill O’Grady, of Confluence Investment, describes a movement that began in the 1980s away from the diversification of energy sources, towards specializing in what is cheaper.
“In a safe world, this is very rational behavior. In a world that is not safe, it’s madness”, he underlines, judging this system “structurally inflationary”.
The two raw materials are moreover only marginally substitutable, gas being mainly used for heating, to produce electricity and in heavy industry such as for the manufacture of cement or chemical products, when oil is mainly used in the transport sector as fuel.
Test weapon
Moscow reopened the gas tap to Europe on Thursday by restarting the Nord Stream gas pipeline, a vital supply for the EU’s energy security, as the countries of the Old Continent strive to fill their reserves for the winter.
Deliveries have resumed at a rate identical to that before maintenance, around 40% of the gas pipeline’s capacity.
But “the whole of the European energy system is going through a crisis”, and gas prices are set to remain high, asserts Karolina Siemieniuk, analyst at Rystad Energy.
Even with the restart of Nord Stream 1, the Old Continent is in a delicate position “with a permanent risk for energy security”, she claims.
For Robert Yawger, disruptions in gas supplies might soon have implications for oil.
The danger, the analyst said, is that if Russia cuts off natural gas flows, it might also “turn off the crude oil taps” putting much of Eastern Europe in trouble.
A hypothesis shared by Abhi Rajendran of Energy Intelligence, who thinks that supply interruptions might even occur before the effective implementation of the European embargo on Russian black gold. “If the supply has to be cut, why not take the lead?”.
