Even birds need to land somewhere, sometimes. Therefore we can not expect energy prices to go forever higher. But which energy prices and when? These are the fundamental questions we have no idea about. But Eurasian geopolitical risks are higher, and Covid is getting normalized. That is to say, no end to the pandemic is in sight, but it may normalize like flu.
Starting from geopolitical risks, the reserves of the Russian Central Bank are at their highest level. If history is a testament, Russian geopolitical moves coincide with Central Bank reserves peaking. The European gas flows are close to the lowest and the European stock levels. The numbers show preparation for a prolonged geopolitical turmoil.
Will covid be a new kind of flu? This is the question we will find some answers to this year. Interestingly, from zero-covid policies to lockdowns, after trying all the strict measures, we end up this way. Pfizer claims that this will be like flu recurring every year (some claims every six months). If, for example, it peaks every six months, the jet fuel demand may struggle.
But we have to understand that we are in a transition period for new stability if it exists. In the post-covid world, stability has not formed yet. Therefore both economy and energy have diverse speeds for different times and geographies. For example, in China, New Year is on the 1st of February, then there will be Beijing Olympics. Coal-burning will be most likely restricted for that period, and gas demand may climb. Before the new year, the oil will increase, and during the new year, it will be mulled. After the winter Olympics, expect China to increase fossil fuel consumption.
COP27 will be in Egypt. And there is a COP calendar. From June to November, the world will see increasing amounts of Africa and global warming news. This year more emphasis will be on Africa. But if Africa is strained with high energy prices, the priorities may get warped.
Most of the countries are trying to subsidize energy prices. However, the bigger danger lies with the fertilizer and food prices. Food prices are key to stability, and energy prices are another factor. If the high prices continue, their trend low-income countries may have struggled to subsidize both food and energy prices. This will create major risks for mid to low-level oil, gas, minerals(like copper) producer countries.
The biggest problem was the instability created by the covid shock. The prices dropped to unprecedented levels. Remember negative oil prices. Consumer enjoyed it, but nearly in a year, we are from one end of the price spectrum to the other. These are really confusing times. Consumer strongly reflects endowment effect. That is to say, discounts have nearly zero effect on morale, but price hikes are extremely painful. Now think about sub 5000$ per capita per country citizens.
New reform packages not addressing the energy crisis will create tensions for sure on the EU level. When the prices are sky-high, everyone gets criticized. The blame game always ends at the top. This creates new divisions and urges to react. We should remember how and why the Energy Union idea has been first published in an FT article.
In temporal analysis, there is a standard trend of oil prices as well as gas prices. Oil prices start increasing after Christmas and increase slowly until May. Then starts the July-October period, where oil prices are more positive than negative. November, December is most likely months for oil price declines due to naturally lowering oil demand.
In the gas case, it is winter and summer. Depending on cold or hot weather shifting, the prices can make surprises in October or April. But the term structure is quite known. However, if Europe starts the spring with very low stock levels, this term structure will be distorted. Adding to all this, the Tonga volcano eruption may drop the global temperatures in the coming two months. This will be another effect on the short-term demand and prices.
But let me come to the opening sentence of this article. Even the birds need to land; therefore, energy prices can not go higher forever. The consumer is feeling the pinch. Industrial productions are slowing down. Therefore we may call 2022 an indecisive year with extreme events. The prices will not find stability anytime soon. But fossil fuel investments are earning such profits that the world may be siphoned into another fossil era with lots of solar investments. 2022 will be confusing.