2 factors that may move energy markets in 2023
- Oil prices heavily dependent on surplus/deficit imbalances
- Asia/Europe competition for LNG risks higher natural gas prices
- Higher energy prices fuel inflation, making it difficult for central banks to respond
Besides Russia invading Ukraine, rising inflation in the advanced economies was the year’s main topic so far. To understand inflation, one should go to the root causes that create it.
That is, energy prices.
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Energy prices have galloped higher in 2022. Crude oil traded close to $120/barrel, fueling a rapid rise in the prices of goods and services.
Natural gas prices advanced even more. With Europe trying to cut its dependency on Russian gas, it had to buy it from elsewhere – at higher prices.
Having said that, it is clear that central banks should watch energy prices first, and act second to tackle inflation. So what is the outlook for energy markets in 2023?
More importantly, what factors will have the biggest impact on energy markets?
Oil prices heavily dependent on surplus/deficit imbalances
Oil prices depend heavily on the imbalances of supply and demand. A war de-escalation and progress in the Iranian talks might lead to lower oil prices as supply exceeds demand.
The risk is that Russia will reduce output, and OPEC+ does not have the capacity to cover for the Russian shortfall. In this case, oil prices should move higher.
Asia/Europe competition for LNG risks higher natural gas prices
Europe has filled its storage for this winter, but the 2023-2024 winter supplies are problematic. If Russian flows come to a complete halt, Europe will have to compete with Asia for LNG imports.
The result should be new record levels for natural gas prices.
To sum up, energy prices are responsible for the rise in the prices of goods and services worldwide. While crude oil prices have declined recently, the question is for how long they can stay lower given the geopolitical situation.