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Not a fossilised relic just yet

Fri, 10/22/2021 - 15:58

With the buzz around renewable energy and EVs following the announcement of Biden’s Green New Deal, oil and other traditional fossil fuels fell out of favour with investors – and this despite record low prices. Brent was trading at a more than twenty-year bottom of $9.12 at the height of the pandemic, but even by the US presidential election in November, it still hadn’t managed to rise above $40 a barrel. All the young Tesla and battery metal ETF investors laughed at the “silly boomers” buying into the United States Oil Fund LP, but they’re not laughing anymore. Brent oil currently sits at a 7 year high of $84.42, which represents a gain of more than 900% from last year’s lows. Indeed, the United States benchmark, WTI Crude, has gained 70 percent this year alone. It’s all part of a wider global energy crunch that is seeing prices pushed higher for all types of fuels, including natural gas and even coal.

As business all over the world return to normal, electricity demand is skyrocketing, and the low supply of key fuels, coupled with seasonal pressure, has led to a perfect storm on the energy market. Several Wall Street forecasters have stated that oil and gas prices are set to peak in the near future, while Goldman Sachs analysts have predicted that the per-barrel price could hold steady around $85 for a period of several years. Mecuria Energy Group Ltd., on the other hand, has suggested that we could see prices north of $100 a barrel this winter. There’s even a sizeable portion of traders who are betting on even greater increases. In fact, the most widely held option is one that pays out if oil tops $100 a barrel by the end of December. However, increasing numbers of options trades with strike prices as high as $200 by late 2022 have also been made lately. As senior market analyst Ed Moya put it: “Crude price volatility is here to stay as demand uncertainty remains elevated over the short-term” and options certainly are an excellent way to balance risk and reward during unpredictable times.  Moya also added, however, that “given the relentless winning streak, oil prices are ripe for significant rounds of profit-taking,” which is undoubtedly true. 

Gas and oil intertwined

To really understand what is driving oil prices higher, we also need to look at its less glamourous cousin, natural gas. Much of today’s non-green electricity is produced by gas-fired generators. However, Europe’s biggest supplier of natural gas, Russia, has been artificially restricting supply to the EU in a bid to fast track the approval of its new Nord Stream 2 pipeline. In fact, Gazprom PJSC’s gas exports to these key markets have dropped to their lowest level since 2014 for this time of year. This is yet another factor boosting oil prices as many European nations are forced to increase oil’s share in their respective energy mixes in order to meet post-pandemic demand for electricity. The effect of this has been even more pronounced in light of the reluctance of OPEC+ to ramp up production as the high prices suit the cartel’s member states perfectly. Obviously, this means physical gas and oil (Henry Hub, Brent, WTI Crude) are still good investments, but even larger gains could be made by owning individual companies that not only own large amounts of these commodities, but which also make large, regular profits from their sale. Gazprom is an excellent example of one such company, especially if the Nord Stream 2 pipeline receives regulatory approval in the short to medium term. The Russian gas giant is already up 120% in a year and is still excellent value with its 8.13 p/e ratio and generous 3.42% dividend.

Make your mind up!

So, which is it? Oil at $100, $200 by year end, or a steady $85 for the long haul? The short answer is: nobody really knows. The interesting thing about this energy crisis is that it is for the most part entirely in the hands of human beings. The supply shortfall would soon be nipped in the bud if OPEC+ would only increase its production at least to their pre-agreed targets. Similarly, the gas shortage in the EU would disappear in an instant if the EU gave Nord Stream 2 the green light to begin operations. In fact, some have said that, with China’s economy slowing down and the US recovery going through a rough patch just now, oil demand is not likely to rise significantly above its current level in the short term. Gas, on the other hand, could well continue to climb given the huge uptick in domestic heating-based demand that will doubtlessly flood in if the harsh, long winter that is expected comes to pass. Longer-term, the price climate is even harder to predict, but forecasts trend towards more price spikes until fossil fuels are phased out entirely. For instance, a recent report from the International Energy Agency found that in order for major world economies to become carbon neutral by 2050, oil use must peak no later than 2025. However, based on current investments, green power generation won’t be sufficient to supplant oil until 2035.

Know your options with Libertex

Libertex allows you to practice your trading skills with the hot instruments on the demo-account before investing real money. For example, you might decide to buy WTI Crude or Brent and a few shares in Gazprom in the hope of some short to medium-term gains, but then purchase an option that would allow you to sell oil at say $70 in late 2022 when prices have probably normalised. Then, if gas and oil do the unlikely and start to trend down, you can quickly close these long positions and strike out your option to cover part or all of your losses. Trading CFDs is risky due to the complexity of the instruments. Diversifying your trading in this way is available for all users thanks to the award-winning Libertex app.

You can control all your positions from one, user-friendly interface and set automatic pending orders to ensure nothing is left to chance. For more information or to register your very own account, visit today!

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