Why we are seeing lower-than-expected energy prices at the start of the new year

Just a few months ago, there were big concerns about a possible surge in energy prices this winter, especially in Europe.

But at the start of the year, things don’t seem to be going quite as expected. Oil and gas prices down significantly, with Reuters reporting that US natural gas prices fell 18% in the first week of January. This is the biggest decline at the beginning of the year since 2016.

Matt Smith is a price watcher for Kpler, where he is the lead American oil analyst. He spoke to the Texas Standard about the state of the energy industry at the start of the new year. Listen to the story above or read the transcript below.

This transcript has been lightly edited for clarity:

Texas Standard: Here we are in January, aren’t we? Oil and gas prices have dropped significantly. Reuters reports that US natural gas prices fell 18% in the first week of January. What happened, or should I say “what happened” to it?

Matt Smith: Well, in fact, according to forecasts promise warm weather. So, we are passing here the peak of the severe mid-winter. And while inventories average five years below last year’s levels, they should recover in the coming weeks given milder weather. Another factor is that US natural gas production was a record last year, while the Freeport LNG terminal was out of service throughout the second half of last year. So, it was assumed that the supply was leaving the country that remained here. So that also played a role. But really, it was just a warmer than expected winter.

Looking at the fact that natural gas prices in Europe have fallen by almost 50% since mid-December, are we talking about the same factors here? Is winter warmer than expected?

Yes, but natural gas is still very expensive in the US. It’s about $20 at MMBtu whereas here in the US we’re just under $4. But this is far from where it was. It was above $40 last month. And understand, it cost almost $100 in September before winter. You know, there was such concern that the supplies would run out. But Europe is just as lucky as the US projections are now in that it had a very mild winter, which caused prices to actually drop below their pre-Ukraine invasion levels. However, all this suggests that Europe is still not out of the woods. They need to replenish their supplies after the winter is over, but here they clearly dodged a bullet.

So where are we in terms of sanctions with Russia? Aren’t they getting better lately?

Yeah, so we’re very much in the middle of those. So at the beginning of December, we introduced rough sanctions, as well as a price cap. We also have a price cap for LNG – liquefied natural gas. But at the moment it’s a bit of a moot point, just because the price cap is so high and the prices are so low, it’s somewhat irrelevant. And finally, the third part is that at the beginning of next month we will receive EU sanctions on environmentally friendly products – that is, on diesel and gasoline. And so we are very actively trying to punish Russia here.

Guess me: why are oil prices also weakening? I mean, I expect these oil prices to rise if you ease these sanctions.

So it’s a couple of things. Crisis fears are really beginning to emerge now. Uncertainty around China too. They can reopen their economy, but, you know, the coronavirus is just spreading across the country. But thirdly, the export of Russian oil has decreased due to the sanctions imposed at the beginning of last month, but has not decreased in any way. Instead, they were diverted from Europe mainly to Asia.

What does all this mean for ordinary Texans? How would you answer this question, Matt?

It’s a bit of a Goldilocks situation as long as the economy holds up because gas prices have now fallen well below $3 a gallon there, while oil prices are high enough to stimulate the oil industry as well. Thus, to save the Texan economy. So we’re in a pretty good position as long as the economy doesn’t drag us down here.

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