The energy sector was in focus on Tuesday as prices made new multi-year highs. The price of natural gas in the US on Tuesday morning was over $6.3 per MMBtu, the highest since 2008. The gas price surpassed $1,000 per thousand cubic meters in European trading, a new psychological and historic high. Coal is now as expensive as it was 13 years ago. Brent futures have surpassed the $80 mark, while the spot market is only getting closer to that level.
While there are many factors behind the rise in energy prices, long-term buyers still have plenty to consider. Stock markets have moved away from the 'stocks only go up' motto, and we see more signs of bears advancing on different fronts. Energy has remained the last refuge for the bulls.
Such trend acceleration and the price skyrocketing are often the final points in a trend.
Two notable examples from recent history come to mind. The first such example was the similar spike in energy prices in 2008. Back then, a barrel of Brent set an all-time high of $147 before everything came crashing down. By then, sellers had already begun to take charge in the equity markets.
April 2020 was another example. At that time, oil prices continued their decline, rejecting the reversal of stock indices to growth. The final chord was struck at the monthly expiry of the WTI contracts in the US when prices temporarily went into negative territory. Brent fell to $16, which was clearly below economically sound levels. That was the turning point.
That is not to say that oil prices are astronomically high right now. Much more worrying is the jump in gas and coal. The chances are high that the market will reach a breaking point in the coming weeks, with sharply lower coal and gas prices pulling oil with them.
From that perspective, potential technical targets near $100 per barrel Brent aren't sustainable long-term targets. The world remains within artificial constraints on oil production. Rising prices and demand promise to push producers to increase production and investment in the industry, easing those constraints.
Moreover, high fossil fuel prices are the best driver for the payback of alternative energy projects.
It is probably too early for investors and traders to bet on falling energy prices, but it is already worth bearing in mind that prices now seem to be detached from reality. Further, signs of falling demand for fossil fuels, which could well coincide with rising supply, are worth keeping an eye on. A shift in the balance of market forces could result in one of the most significant selloffs in the energy market in recent years.
The FxPro Analyst Team