A year and a half after a renowned Harvard professor described the pandemic of 2020 as “the mother of all shocks” to energy markets, oil and gas prices are still being rocked by supply and demand shocks, with economic growth trends and geopolitical tensions offsetting or exacerbating them.
“One reason why oil and gas prices are so volatile is that short-term demand for energy responds much faster to changes in growth than to price changes. So, when there is an energy shock, it can take a huge price change to clear the market,” Kenneth Rogoff, a Professor of Economics at Harvard University and former Chief Economist and Director of Research at the International Monetary Fund (IMF), wrote in an opinion piece in Project Syndicate in July of 2022.
The big shock to energy markets that year was the impact of the Russian war in Ukraine on global oil and gas supply and prices.
Yet, the pandemic of 2020 was “the mother of all shocks, bringing about the biggest sustained shift in demand since World War II,” Rogoff said.
According to the economist, in the longer term, “Giant waves of supply and demand shocks will likely continue to roil energy markets and the global economy.”
Shocks are always lurking around the corner in the energy markets. After the big Russian export destination shift, the geopolitical event of 2023 that disrupted flows again was the Hamas-Israel war, which started in the last quarter of the year.
The market had just adjusted to Russia’s crude and oil products going to Asia, Africa, and South America instead of to Europe. Now, it’s grappling with trade route changes as tankers carrying oil and LNG have started to avoid the Suez Canal and the Houthi missile attacks in the Red Sea and are opting for two-week-longer routes via the Cape of Good Hope in Africa.
These new shocks to global oil and gas markets have been largely offset by constant concerns about the state of the global economy and fears that recession hasn’t been avoided yet.
According to Rogoff’s forecast, carried in Project Syndicate last month, 2024 could be a “rocky year for everyone.”
The economist believes that the chances of a recession in the U.S. are still “probably around 30%, compared to 15% in normal years.”
China still faces “several daunting challenges” to have its economy recover to 5% annual growth, while other emerging markets could be most at risk to withstand a crisis if the global economy falls short of expectations, Rogoff says.
In oil markets, on the supply side, OPEC+ continues to cut production and exports in 2024, while non-OPEC+ producers have surprised to the upside with supply growth, offsetting some of the cartel’s cuts.
The shock on the natural gas markets from 2022 and early 2023 after the Russian invasion of Ukraine was mitigated by a warmer 2022/2023 winter and industrial slowdown in Europe, as well as high LNG imports and a rush to replenish stockpiles, which were full to the brim ahead of this winter.
After the pandemic, economic and geopolitical factors continued to surprise energy markets, leading to high volatility. Crude oil prices, which had tanked in the spring of 2020, surged to above $130 in the wake of the Russian invasion of Ukraine. Natural gas prices hit records in August 2022 when Russia cut off most pipeline gas supply to Europe.
Still, shocks such as the Hamas-Israel war that would have pushed prices higher have been offset by continued concerns about the global economy.
Demand has been resilient over the past year, but concerns about economies are keeping a lid on oil price spikes from the rising tensions in the Middle East, the world’s most important oil-exporting and oil trade route region.
Weak economic data and the ongoing property crisis in China, plus a U.S. economy not out of the woods yet, have also contributed to a muted market reaction to OPEC’s cuts to supply.
Following a short-lived spike in oil prices after the Hamas-Israel conflict began in early October, futures have traded in a narrow $75-$80 a barrel range, suggesting that economic and demand reduction shocks could outweigh in the near term supply shocks, unless a wider conflict in the Middle East cuts actual supply to the market.
