Al Attiyah Foundation's Weekly Energy Market Review - Jan 9, 2021

By Al Attiyah Foundation, Qatar

By Al Attiyah Foundation

Oil prices hit their highest level nearly a year on Friday, gaining 8% on the week, supported by Saudi Arabia's pledge to cut output and strong gains in major equity markets. Brent crude settled at $55.99 a barrel, climbing 3% on the day and 8.1% on the week. West Texas Intermediate crude futures (WTI) closed at $52.24 a barrel, gaining 2.8%, also its highest since late February, and posting a weekly gain of 7.7%.

Saudi Arabia last week pledged extra, voluntary oil output cuts of one million barrels per day (bpd) in February and March as part of a deal under which most OPEC+ producers will hold production steady during new lockdowns. The Kingdom, the de facto leader of OPEC, was at odds with some other producers who wanted to boost output to head off US shale companies to capture more market share. Eventually, OPEC+ reached an agreement to allow Russia and others to boost output while the Saudis restrict theirs.

Still, many analysts suggest oil prices could see a correction in the coming months if fuel demand remains constrained by the pandemic. Strict restrictions on travel and other activity worldwide to contain a surge in Covid-19 cases are weighing on fuel sales, weakening the prospect of an energy demand recovery in the first half of 2021. The pandemic claimed its highest US death toll this week, killing more than 4,000 people in a single day, while China reported its biggest rise in daily cases in more than five months.

A global equities rally pushed Japan's Nikkei and US stock benchmarks to new records, as investors focused on further stimulus to mend the pandemic's economic damage. The US Congress may also soon approve more pandemic relief. This scenario became more likely after two Georgia Democrats won Senate seats that hands Democrats thin control of both houses of Congress once Mr. Biden is sworn in.

Gas Markets: LNG Prices Rise to a Record High

Asian spot prices for LNG jumped nearly 50% last week to a record high, based on available data going back to 2009, as logistical issues disrupt supply to the world's top consuming region. The average LNG price for February delivery into North-East Asia was estimated to be around $21.45 per million British thermal units (mmBtu) on Friday, according to pricing agency S&P Global Platts, up 47% from the previous week ($14.60). The price is a record high since Platts started assessing the Asian market in February 2009. An individual cargo was also closed above $30 per mmBTu.

Spot Asian LNG prices led the global energy complex late last year, gaining more than 140%. This week's rally partially results from strong demand for heating during a colder-than-average winter and a shortage of supply in key producing countries such as Malaysia. Japanese power generators are reducing run rates on their gas plants as they compete with LNG buyers across North Asia. 

In addition, there have been logistical constraints in bringing supply from the US and Europe to the Pacific. Trafigura, one of LNG's biggest independent traders, has pushed up prices for delivery in the first half of February, bidding for cargoes at $25.00 and $27.80 for delivery in South Korea. Freight rates have risen five-fold in two months to $223,000 per day according to Spark Commodities. 

US gas has been following the upward trend, but futures eased on Friday on forecasts for mild weather over the next two weeks. Even after rising for five days in a row for the first time since August 2018, before dipping slightly on Friday, Traders noted that US prices were much lower than in Europe and Asia, prompting buyers to purchase record amounts of US LNG.

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DISCLAIMER: The views expressed in this insight piece are those of the author and do not necessarily reflect the official policy or position of IndraStra Global.