FACTORS THAT MAY HAVE PROMPTED UNEXPLAINED LNG PRICE HIKE DESPITE COVID, GLOBAL GAS MARKET MARKED BY BULLISH TREND

Neither the government nor the gas companies have explained why the LPG prices for commercial cylinders have been increased, a decision that has caused widespread concern on its effect on the slowly recovering economy. Both seem to believe that they don’t owe an explanation anyway as their approach has been arbitrary and inconsiderate: a kind of like it or lump it attitude. The public at large is at a loss to understand why prices have been hiked even as petroleum prices have been on a downward trajectory, further aided by Omicron concerns, the depth of which still remains unclear.

So, in the absence of any official clarification, one can only go by conjectures. Apparently, despite the bearish trend in the international oil markets, the gas market has been tending to move in the reverse direction. Although gas prices also risk headwinds from Omicron, particularly the uncertainty about effectiveness of vaccines on the new virus strain, gas prices are showing a bullish trend in the international market.

This is attributed to the possibility of below-normal winter temperatures in Europe as well as accelerated withdrawals from the already low storage levels. According to latest estimates by energy consultancies, storage levels are already down 4 percent from last week and assuming a 5-year average depletion profile between now and end March 2022, storage levels may start at a very low 21 percent of notional capacity by April. Accordingly, LNG imports continue to be robust, with Western and Southern Europe importing around 6.8 Mt in November, up from 5.7 Mt in October, contributing to a certain level of comfort to the market at the year-end. Similarly, storage depletion is expected to accelerate if the US weather takes a turn for the cold and residential heating demand increases sharply.

LNG prices continue to provide a significant source of competing demand for exports. Asian buyers, particularly Japanese and Korean traders, have reluctantly returned to the market for spot procurements amidst forecast of colder than normal winter as well as production constraints. They were waiting for the prices to come down, but were disappointed to see that not happening. In fact, according to market analysts, Chinese buyers have been priced out of the spot market, forcing the country to steadily raise the already high volumes of pipeline imports from Russia.

The oil market is weighing the threat from Omicron and latest reviews estimate that if the virus triggers more lockdowns or curbs, it could cost the global oil market as much as 2.9 million barrels per day (bpd) of demand in the first quarter of 2022, bringing total expected demand down from 98.6 million bpd to 95.7 million bpd.

Analysts have tried to break down the projected impact on specific oil products, which illuminates how Omicron could affect different elements of the global economic recovery. In the first quarter of 2022, demand for gasoline could fall by up to 1.3 million bpd to 24.2 million bpd, a 5 percent decrease from the base levels of 25.5 million bpd.

Similarly, Jet fuel demand would also be significantly impacted as demand for flights and travel slows. Estimates show jet fuel demand could drop 6 percent in the first quarter of 2022 from the expected 5.5 million bpd to 5.2 million bpd. The second and third quarters would probably see a deeper plunge, dropping 10 percent in the second quarter from 6.1 million bpd to 5.6 million bpd, and 11 percent in the third quarter from 7 million bpd to 6.2 million bpd.

The current global oil demand for road transport, estimated to be about 44.7 million bpd, is almost at pre-pandemic levels, representing 97.4 percent of demand in the corresponding week in 2019. On the other hand, global demand for oil for aviation lags the equivalent 2019 total and stands at 5.1 million bpd, only 70.4 percent of the corresponding week in 2019. With the restoration of air travel curbs by several countries in view of the Omicron threat, the aviation sector is set to see even bigger crisis.

Countries and regions have reacted differently to the pandemic thus far, prompting analysts to anticipate that trend to continue with the Omicron variant. For instance, countries in North and South America, including the US, will likely try to weather the storm and prioritize economic activity. Countries such as China and Australia have in the past displayed a zero-tolerance approach and are expected to continue with this strategy amid future waves. European and Middle Eastern governments are likely to fall in between these two extremes as they try to find equilibrium between economic activity and preserving the health and safety of their populations. India stands somewhere in the middle.