Making Sense of Energy Market Turmoil

I don’t know how else to say this: Energy markets are going a little crazy. First, crude oil prices plummeted, turning an earlier autumn rally into a bear-market rout. From its high of about $76 per barrel on Oct. 3., benchmark West Texas Intermediate plunged to about $55 in only five weeks. Then, natural gas prices went haywire, with the benchmark gas futures contract leaping from about $3 per million British thermal units to nearly $5 in a span of days, only to plunge back to $4 today. What exactly is going on?

It appears that certain market expectations about future energy supply and demand are getting violently recalibrated. Oil rallied through most of autumn on expectations that the return of U.S. sanctions on Iran would crimp its oil exports at a time when the strong global economy needed more crude. But production ramped up elsewhere; the Trump administration granted temporary waivers to a few countries that buy Iran’s oil; and now there are signs that global economic growth is slowing. Suddenly, many bullish bets on crude oil needed unwinding. Oil prices fell for 12 consecutive trading days, a new record.

Natural gas prices soared when weather forecasts showed cold air poised to spread over the heavily populated Northeast and Midwest and traders suddenly noticed that the amount of gas in underground storage is low for this time of year. In a matter of days, gas prices shot up 50%, before giving back much of those gains today, when the Department of Energy reported that stockpiles grew modestly last week.

Here are the two main points that I take away from this volatility:

First, oil markets remain well supplied, largely thanks to the U.S. American oil production hit another record high this week, with output of 11.7 million barrels per day. That’s the most of any country in the world. And production should keep growing briskly next year, especially after new pipelines in Texas are completed, allowing producers to ship more crude to refineries and export terminals on the Gulf Coast. (Think about that for a moment: Texas is producing so much oil that it’s gotten difficult just to move it.)

Other countries stepped up their production in advance of the Iran sanctions taking effect, too. Just Russian and Saudi Arabian output combined more than offset the lost Iranian production. Granted, the Saudis said they will pull back, and OPEC may choose to do likewise when its members meet in Vienna next month. But that the cartel feels the need to close the taps a bit again shows that the world has plenty of oil.

Second, natural gas prices figure to be volatile throughout the winter, and the risk of sustained price hikes is real if the winter ends up being colder than normal. As with oil, the U.S. is producing record amounts of natural gas. But consumption is high, too. Utilities now generate more electricity from gas than they do from coal, and U.S. exports of natural gas are on the rise. Add in heavy demand during a sustained cold snap, and the gas distribution network will struggle to get enough gas everywhere it needs to go. Plus, extreme cold can cause gas wells to freeze up, cutting into supply when it’s needed most.

Consumers can look forward to bigger savings at the gas pump. The national average price of regular unleaded gas now stands at $2.67 per gallon, down from almost $3 earlier this fall. Prices should slip further as the big drop in oil prices filters through to the retail level. The drop in oil prices is also good news for propane and heating oil users. Prices of those two fuels started the heating season well above their levels of the prior year. And the unseasonably cold weather hitting much of the country means heavy demand. But with crude prices down, propane and heating oil should ease, too, or at least hold steady.

If you heat with natural gas, budget for higher bills than last winter. Even before this week’s spike in gas futures prices, residential prices were running higher than last year. The Department of Energy recently forecast that U.S. households that heat with gas would pay about 5% more this winter they did last year. But that’s assuming a near-normal winter. In a colder scenario, the department projects those customers’ heating bills would jump by 16%.

Still, don’t worry too much about actual shortages. Although supplies of gas in storage are below average, output will keep growing at a steady clip as energy companies get ever more efficient at tapping into America’s sprawling gas reservoirs. It’ll probably cost more than last year, but barring a new ice age, there will be enough gas for everybody to stay warm.