by Emmeran Eder, Euro on Sunday
So now he has actually done it. Wladimir Putin turns Germany and Europe off the gas. Only 40 percent of the previous gas volume flows through the Baltic Sea pipeline Nord Stream 1 to Germany. Since German gas storage facilities are currently only 57 percent full, there is a risk of bottlenecks as early as autumn. The situation is similar in the rest of Europe.
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Now there is a discussion about how to counteract the energy shortage. In addition to saving energy, the extension of the service life of nuclear reactors and the increased use of coal-fired power plants are under discussion. Federal Economics Minister Robert Habeck called on the operators of coal-fired power plants held in reserve to prepare now that everything would be ready for use as soon as possible. “That’s bitter, but in this situation it’s almost necessary to reduce gas consumption,” said Habeck. A corresponding law is to be finally discussed in the Bundesrat on July 8th.
“However, Germany and Europe must find as many other sources as possible,” says Industry President Siegfried Russwurm. For example, companies should switch from gas to oil where possible. In addition, gas-fired power plants are to be shut down and replaced by oil-fired power plants. This in turn is likely to have an impact on oil consumption and the oil price. It has recently given way after a previous strong increase.
surprising prognosis
The main reason for this was the forecast by the International Energy Agency (IEA) for the second half of the year. Unlike almost all other market participants, it expects a slight oversupply of oil in the next six months.
According to the agency, this is due to a higher than expected offer from the non-OPEC countries. For one thing, oil production in Russia is falling less than previously forecast. On the other hand, production in North America is increasing significantly. In addition, the IEA reduced its demand forecast slightly.
Added to this is the sharp rise in interest rates in the USA and other countries. This increases fears of a recession on the market. Should the global economic crisis occur, less of the black liquid would be needed.
OPEC, the Organization of the Oil Exporting Countries, sees things very differently. Their demand forecast for the second half of the year was even raised slightly. In contrast to the IEA, supply from non-OPEC countries is expected to increase less than previously expected. At the same time, since OPEC production is likely to remain significantly below the announced level, the oil market would show a supply deficit of around 1.5 million barrels per day in the second half of the year. It is actually questionable whether OPEC will be able to compensate for this by expanding production sufficiently. Because there are currently funding problems in both Libya and Nigeria. In Libya due to extensive maintenance work, in Nigeria several kilometers of pipeline are defective.
Apparently more oil is coming onto the market from Russia: According to data from the Russian Ministry of Energy and calculations by the financial services provider Bloomberg, Russian oil production was 10.7 million barrels per day in the first 13 days of June. That’s five percent more than in May, putting production 300,000 barrels a day above OPEC’s forecast. Due to the limited production capacity of OPEC+, which includes both the OPEC countries and Russia, other members of the organization can only increase their share slightly if Russian production remains high. Consequence: The global long bid remains tight.
Away from Russian l
Russian oil is now flowing more and more to China and India as Europe massively scales back oil imports from Putin’s empire. The Indian government recently even encouraged domestic oil companies to buy Russian oil, as it is offered at a large discount. Almost all EU countries intend to do without Russian oil by the end of the year. Only ten percent of the original quantity will then be imported from Russia.
Due to the failure of Russia, Europe needs alternative suppliers. These include Angola, Brazil and Iraq. Imports from these countries have increased by 200, 50 and 40 percent since the start of the Ukraine war. This development is likely to continue. The problem is that oil from Africa and South America is more expensive than that from Russia. “A direct impact is higher freight costs because of longer routes, which increases the cost of delivery of oil,” says Roslan Khasawneh, an analyst at Vortexa, a British-American energy data provider.
tighter US job market burdened
Little help for falling oil prices is also likely to come from North America. Although production has increased recently, it is still well below the level before the outbreak of the Corona crisis. As the Biden shale industry struggles with more regulation than it did during the Trump era, it is focusing more on deleveraging and payouts rather than investing in new oil sources. In addition, the tight labor market is making it difficult for oil companies to find workers. “Therefore, a return to the production increases of the Trump years is unlikely,” says oil analyst Carsten Fritsch from Commerzbank.
Another driver for the price of the black gold could be a quick end to the lockdown in China. Matt Smith, an oil expert at the French market research company Kpler, which specializes in commodities, doesn’t see that because the government in Beijing is only opening up in stages. Nevertheless, even a gradual return to everyday life should at least support the current high level of oil prices.
Moreover, hopes that Iran could help to reduce the supply gap through high oil exports seem to have been dashed. The negotiations over the nuclear dispute are on the verge of collapse.
At the moment there is more to be said for the oil price to continue to rise rather than fall. At least this should remain in the three-digit range and thus at a high level. The beneficiaries of this are the big oil multinationals, whose profits should continue to bubble up. Investors should bet on this, as further price gains lure.
INVESTOR INFO
Depending on the market situation, the Vontobel paper relies on ten major US oil companies or a WTI oil future. If long-term falling oil prices are expected on the oil futures market (backwardation), the WTI future is bought. Then there are roll wins. That is currently the case. If rising prices are expected in the long term (contango), the money flows into stocks. That’s how it’s often been in the past two years. The review takes place monthly. Since the issue at the beginning of 2017, the plus has been 86 percent, and since April 2020 even almost 150 percent.
The Italian oil and gas group Eni has a filling station network and produces, refines and sells oil and gas. With its strong presence in Africa and Qatar, the Group plays an important role in securing Europe’s oil and gas supplies. In this respect, the earnings prospects for Eni should remain excellent in the long term. In the first quarter, profit rose by a good 30 percent compared to the previous year.
Exxon Mobile
Thanks to high oil prices, profits are bubbling up at US industry leader Exxon Mobil. After a top business year in 2021, the oil and gas group can also look back on an excellent first quarter in 2022. The prospects remain positive. For 39 years, the company has steadily increased its quarterly dividend.
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