Soaring natural gas & oil prices lift energy shares

Energy market update; inflation gauge

Oil price continues to rise with Brent crude back near 3-year highs.

Natural gas prices (delivered into Asia) rose 86 per cent in September.

The monthly inflation gauge rose 0.3 per cent in September to be up 2.7 per cent on the year.

Energy market update

• Regular readers would be aware that we provide an update on the oil market each Monday. Oil prices have been marching higher in the past month and this has been reflected by the lift in share prices in the Energy sector. In fact the Energy sector rose by 16.4 per cent in September to 8-month highs.

• Demand for oil is lifting as more economies re-open after Covid. At the same time, oil production (supply) has been disrupted by Covid as well as weather events such as hurricanes. OPEC+ oil producers meet later today and analysts expect that producers will add just 400,000 barrels per day in extra output in November. So oil prices are set to remain high with a number of pundits tipping prices to reach US$90 a barrel.

• Over September, crude oil rose almost 11 per cent. But it hasn’t been the only energy price to soar in the past month. Natural gas prices (LNG in Asia) soared by 86 per cent in September with thermal coal prices also up by almost 31 per cent. (Notably coking coal prices also lifted 29 per cent in the month while iron ore lost 23 per cent).

• CBA commodity strategist Vivek Dhar has noted that LNG spot prices delivered to North Asia have surged on stronger demand “as LNG importers looked to secure enough cargoes for the upcoming winter.”

• “Competition for LNG cargoes is also increasing on the back of European gas shortages. European gas storage levels are tracking around ~75% of capacity – well below the 5 year average of ~90% for this time of year. The gas shortage in Europe reflects reduced imports from Norway and Russia, as well as weaker domestic gas production. Higher gas prices in Europe has prompted LNG spot prices in North Asia to rise.”

• Vivek notes that demand from Central and South America has also tightened LNG markets. “Global LNG supply issues have also exacerbated the tightness in LNG spot markets, despite LNG exports tracking higher relative to last year and 2019.”

• The soaring gas prices in Europe are now going by the title of the “European power crisis”. While demand for gas is up, exacerbating the situation is that energy producers are moving away from coal and nuclear energy while supplies of some forms of renewable energy such as wind have also been constrained. It has been estimated that gas accounts for around a fifth of electricity use in Europe and around 45 per cent of the energy used to heat European homes.

• And it’s being termed an “energy crisis” or “power crisis” also in China, with Bloomberg reporting that Chinese Vice Premier Han Zheng “ordered the country’s top state-owned energy companies – from coal to electricity and oil – to secure supplies for this winter at all costs”. In China, access to thermal coal supplies is the greatest worry.

• But it’s not just prices of gas, or commodities more generally, that are going up, prices are rising for a raft of goods and services. Simply, people are coming out of lockdown and wanting to travel and spend but the lockdowns have restricted the amount of goods on the market. In the gas market, fewer staff on board has meant less maintenance has been carried out.

• Central banks believe the price hikes are just temporary or transitory, but they need to ensure that the loftier price gains don’t hang around for longer. So the broader issues are inflation, rising longer-term interest rates and decisions by central banks on whether now is the right time to wind back stimulus.

Weekly oil market data

• Over the week Brent rose for the fourth straight week, up by US$1.19 or 1.5 per cent to US$79.28 a barrel. Nymex rose for the sixth straight week, up by US$1.90 or 2.6 per cent to US$75.88 a barrel.

• The benchmark Singapore gasoline price rose by US68 cents or 0.8 per cent to a 3-year high of US$87.60 a barrel last week. In Aussie dollar terms, the Singapore gasoline price lifted $2.37 or 2 per cent to a 3-year high of $121.61 a barrel or 76.48 cents a litre.

• The national average wholesale (TGP) petrol price rose by 2.5 cents last week to 142.0 cents per litre. Today the TGP price sits at a 3-year high of 144.2 cents per litre.

• The national average unleaded pump price fell by 3.3 cents last week to 152.1 cents a litre.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 151.0c/l; Melbourne 151.2c/l; Brisbane 151.4c/l; Adelaide 140.0c/l; Perth 143.7c/l; Hobart 159.9c/l; Darwin 151.9c/l and Canberra 160.1c/l.

Today’s economic data: Monthly inflation gauge

• According to the Melbourne Institute, headline inflation rose 0.3 per cent in September to be up 2.7 per cent on the year. The trimmed mean measure rose by 0.4 per cent in the month to be up 2.6 per cent on the year.

• Since June, the monthly average headline rate has been trending near 0.2-0.3 per cent a month or around 2.5-3.0 per cent annual. And annual growth for the trimmed mean has lifted from 1.8 per cent to 2.6 per cent.

• The Reserve Bank would be happy to see the lift in inflation to the 2-3 per cent target zone but would also want to see higher wages in response to a tightening job market.

• However it will require NSW, Victoria and the ACT to emerge from lockdowns before clearer readings are possible on the job market.

Published by Craig James, Chief Economist, CommSec