Taking the sting out of the energy markets

• Gas and power prices are down to start the year, and coal is trailing lower.
• Lower commodity prices are having a positive impact on debt and tech markets.
• Coordinated government policy on supply chain reorganisation and higher private production are starting to have a lasting effect on energy prices.

Energy lower

Oil prices have struggled over the last few days, following natural gas lower in the international markets. As a result, Australia’s prominent energy players have sold off.

Oil and gas exploration and production company Santos Limited ASX:STO (STO) has dipped below $7 AUD / share to start 2023; significant gas player Woodside Energy Group ASX:WDS (WDS) fell 2.4% in Wednesday trading as the market rallied on aggregate.

US Production

Surging US production and exports mixed with warmer European weather has oil and gas markets swooning.

High prices in Europe have served to dent gas and power consumption. The market is now pricing in that these conditions will continue in future winters.

The above combination is now starting to take its toll on energy markets. Dutch gas prices for prompt delivery have fallen below those at the start of 2022.

The US natural gas benchmark of Henry Hub is back below $4 USD / MMBTU for the first time in almost 12 months. Natural gas export powerhouse Cheniere Energy, Inc NYSE:LNG (LNG) is down 20% from the start of December last year. The stock market is now pricing in lower future demand for US LNG than anticipated five weeks ago.

Softening energy demand

Many factors contribute to the swooning energy markets at the start of the year. Some possible reasons for a decrease in energy demand at present could include the following:

• Economic conditions: If the economy is performing poorly, businesses might cut back on production, decreasing energy demand.
• Seasonal factors: Energy demand will fluctuate depending on the time of year. For example, energy demand will be lower in the summer due to a reduced need for heating homes and businesses.
• Changes in energy prices: If energy prices increase, consumers and businesses may cut back on energy use to save money.
• Technological changes: The adoption of energy-efficient technologies can lead to a decrease in energy demand.
• Changes in energy policies: Governments can implement policies to promote energy conservation, which can decrease energy demand.

Lower prices

• Reduced energy costs can lead to lower prices of goods and services, as some businesses pass on their energy savings to consumers.
• It can make energy-intensive industries more competitive, leading to increased economic activity and job creation.
• Disposable income for households may increase, and they will have more money to spend on other things.
• Lower prices also benefit governments, as they can spend less on energy subsidies.
• Lower energy prices can also lead to increased energy security, as countries will be less reliant on foreign sources.

Summary

Energy prices have been falling for several weeks, and the latest production and consumption data suggest that the effects may last long enough to impact global economic outputs positively.