Why Energy Prices are Likely to Retest Recent Peaks

Biden administration’s timely action to shoot down some suspected Unidentified Flying Objects over the U.S. and Russia’s announcement of an oil-production cut by 500,000 barrels per day looks full of skepticism.

Undoubtedly, Putin’s administration seems to be weaponizing energy to hit back at the G7’s price caps by announcing production cuts and its minimum price structure.

Russia will slash its oil production by 5%, or 500,000 barrels per day, from March, Deputy Prime Minister and de facto energy minister Alexander Novak announced on Feb. 10, 2023.

Novak said,

“It continues the destructive energy policy of the countries of the collective west.”

I believe that Russian production cuts will not only disproportionately hurt developing countries and will also have a devastating impact on the West.

The world is struggling to control increasing inflation with the devastating impact of the steep rise in energy prices amid recessionary fear.

Global central banks are on high alert to control inflation, which saw a steep surge in 2021-22 after the global economic slowdown under the direct or indirect impact of pandemic restrictions.

On the other hand, since the temporary shutdown of the Freeport LNG terminal, natural gas prices had hit $10 before sliding downward below $3, which could be discouraging for energy producers.

Low energy prices could reduce inflationary pressure as the oil and gas-producing countries prefer high energy prices for their economic growth as they have only energy resources to survive.

Weather outlooks and other factors, once used to be the conventional methods for the energy-analysts to map the price direction of energy contents, could be replaced if Russia encourages the use of energy as a tool to weaken the economies of the other countries that capped oil and gas prices to control its aggressive destruction in Ukraine.

Undoubtedly, this attempt to use energy as a tool could encourage others to use other commodities in the same manner, to impact the economy of others in one way or the other.

No doubt, supply disruption since the second-largest U.S. liquefied natural gas (LNG) export facility was knocked offline by a fiery blast last June resulted in a sharp surge in natural gas prices. This may take a few more months to resume normalcy.

Still, the timeline for a restart of this facility is not visible and could keep the natural gas and oil prices higher.

On the other hand, under-investment in oil fields since the coronavirus pandemic could disrupt oil and gas production, as the higher interest rates will add one more leg to this problem.

Over-flowed stockpiles, lower energy prices, and the risk of interest-rate hikes will push the energy prices higher from the current levels.

I conclude that if the opening of the Freeport export facility does not resume normalcy soon, oil and gas prices could spike amid changing geo-political moves.

Weaponized energy could also be the next threat to grain and perhaps platinum and palladium, which the whole world will need in its push for electric vehicles to promote green energy.

Disclaimer: The author of this analysis does not have any position in Natural Gas futures. Readers are advised to take any position at their own risk, as Natural Gas is one of the most liquid commodities of the world.