Consumers around the world will feel the pinch of higher energy prices as demand outpaces supply, increasing the cost of travel, heating and food, S&P Global Platts analysts said Oct. 14.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
"We are going to see it feeding into all the commodities," said Chris Midgley, global head of analytics, S&P Global Platts, noting that supply is working to keep up with a "surge in demand as we recover from the troughs of the worst effects of COVID back in April 2020."
Midgley was speaking at the press briefing of the virtual Platts Energy Summit.
"We are heading into a 'Winter of Discontent' where supply across all sectors is struggling to keep up with the rebound in demand, leading to spikes in commodity prices," he said.
Tight gas supplies in Europe have pushed the price of the European benchmark TTF contract to an average $33.77/MMBtu in Q4, up from the Q3 average of $29.00/MMBtu.
High gas prices have resulted in fertilizer plants shutting down, creating a spike in prices, with Platts Analytics estimates that 3 million acres of US corn will switch to soybeans, leading to higher corn prices and weaker ethanol margins, said Rick Joswick, head of global oil analytics, S&P Global Platts.
Gas prices have also risen in Asia and the increased price has had a knock-on impact on refining margins globally.
This has added between $4-$5/b to refinery operating costs to refiners using gas as power, with some refiners instead using fuel oil for power, Joswick said.
"High natural gas prices resulting in gas-to-oil switching is adding just over 500,000 b/d of oil demand this winter," he said at the press briefing.
Importance of Iran deal
Fuel switching is increasing the pull on an already tight oil market.
The decision by OPEC+ to limit November's quota increases from the expected 800,000 million b/d to 400,000 b/d shows how tight oil markets are, as the price of Brent breaches the $80/b level to reach levels not seen since September 2018.
"As OPEC unwinds its quotas, it will have limited capacity to deal with supply disruptions or a no-Iran-Deal next year, which could point oil prices further north," Midgley said.
Whether a deal is struck to allow 1.5 million b/d of Iranian oil to return to the world market is just one of flash points which could tilt the oil supply/demand balance. Other factors include the outcome of upcoming elections in Libya and Iraq as well as the how active a hurricane season the US Gulf Coast has next season.
These disruptions supply could exceed spare capacity, and cause oil to exceed $100/b, but "that's not our core forecast," Midgley said.
OPEC has about 3.5 million b/d of spare capacity, but about only about 1.8 million b/d of sustainable spare capacity, he added.
Shale oil plays muted role
Midgley noted that US shale oil is playing a smaller role in stepping in role as the swing oil supplier. This is due in part to "strong capital discipline" by producers, as shale plays appear to have lost some of its luster for big players who have not increased their drilling rig count.
The US rig count increased for the fourth consecutive week, according to data from Enervus released Oct. 14, with the Permian adding three new rigs to reach 272 drilling rigs – which is 63% of the pre-pandemic level in March 2020.
While smaller players have increased the number of rigs their rigs are less productive, Midgley said.
According to Energy Information Administration data, new well oil production from Permian rigs averaged 1,228 b/d in September, with October levels seen dropping to 1,223 b/d.
Also, smaller players have felt the loss of needed capital from banks due to the shift by investors away from fossil fuels toward energy transition investment, he noted.