Oil Hits Three-Year High as Natural-Gas Crunch Spills Into Crude Market
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A shortfall in global energy supplies spilled into crude markets on Tuesday, pushing oil prices to their highest levels in three years before pulling back amid a broader selloff in financial markets.
Brent crude oil, the global benchmark, grazed the $80-a-barrel mark in early trading before later falling 0.8% to $78.08 a barrel. U.S. crude futures also handed back early gains later in the day, slipping 0.8% to $74.82 barrel.
Both key benchmarks have jumped around 9% over the past month as part of a broader rally in energy markets, with depleted natural gas inventories and resurgent economic activity sparking fierce competition in Europe and Asia for natural gas to feed their power markets.
“Oil’s move is really to do with the global energy crunch coming out of the gas power market,” said
Norbert Rücker,
head of economics at Swiss private bank
“This is now spilling over into the oil market because of the expectation that this energy scarcity means we’re going to use oil for spillover demand.” In some power plants, oil can be used to generate electricity when gas prices surge.
A global natural-gas production deficit, depleted inventories and a push from the Chinese government to slash emissions—switching out coal for gas—have all played a role in pushing gas prices higher. That comes as the Northern Hemisphere heads into the winter indoor heating months. The supply crunch has already put several retail energy providers in the U.K. out of business.
Record-high gas prices have exacerbated the oil market’s already tight supply-and-demand balance. Cumulative losses in U.S. Gulf of Mexico production following the impact of Hurricane Ida last month have reached more than 30 million barrels and could hit more than 55 million barrels before all production is restored, according to
Helge André Martinsen,
senior oil market analyst at DNB Markets.
Those dynamics have prompted analysts to raise their oil-price forecasts.
increased its Brent price forecast for the end of 2021 by $10 to $90 a barrel on Monday, with head of energy research
Damien Courvalin
citing both Hurricane Ida and the likelihood that “the global gas shortage will increase oil-fired power generation.”
Power plants are already starting to switch from using natural gas to using oil in Asia, says
Claudio Galimberti,
senior vice president of oil markets at energy consulting firm Rystad Energy.
Asia’s power generation sector currently uses around 900,000 barrels of oil a day and has around 550,000 barrels of unused oil-burning capacity, largely in Japan. Mr. Galimberti says he expects Asian power sector demand for oil to increase by 400,000 barrels a day in the coming six months, meaning “utilization of the oil-burning infrastructure will surge.”
Futures for U.S. natural gas jumped earlier in the day before slipping 0.4% to $5.71 per million British thermal units.
In Europe, benchmark gas futures rose 3.2% to €78.95 a megawatt-hour, putting the contracts on course for their highest closing price on figures dating back to 2013.
European natural-gas prices have more than quadrupled this year and the rally is unlikely to relent soon, according to
Georgi Slavov,
head of fundamental research at brokerage Marex Spectron. Weather forecasts point to a chilly November and December in Europe, which would bolster gas demand, Mr. Slavov added.
Coal and carbon-permit prices initially headed higher, too, adding to the strain on energy-hungry companies and industries in Europe, before handing back most of their gains as broader markets turned lower.
The producer nations of the Organization of the Petroleum Exporting Countries are a wild card in the oil-price mix. They continue to hold back barrels from the market to keep prices high enough to profit. But they have a history of releasing more supply into the market to avoid high prices from stifling demand.
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Oil prices are at their highest in three years amid a shortfall in global energy supplies.
Photo:
Blake Ovard/Associated Press
OPEC, which released its long-term energy forecasts Tuesday, is already in the process of relaxing production cuts that underpinned oil prices during the pandemic. It meets next week to discuss possible further production increases.
“OPEC is still ramping up production and [the market is] getting frothy but by next year we have confidence that we see much lower prices,” said Julius Baer’s Mr. Rücker.
—Joe Wallace contributed to this article.
Write to David Hodari at David.Hodari@dowjones.com
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