Sector report: Oil and gas

Since the beginning of the pandemic, there has been quite a tumult and then a turnaround in the oil and gas industry, or at least in the prices of the underlying commodities that dictate its development. The year 2020 will go down in history as a rather eventful one for the black gold. By the end of the third quarter of 2021, oil prices stood at above $70 per barrel (WTI) and $80 per barrel (Brent). However, they had been incredibly volatile during the pandemic. In April 2020, when the covid-19 pandemic reached the western world and stay-at-home orders were imposed, pressures on both the demand and supply side had made the oil price go down to lower than $20 per barrel, down from a range between $50-$60 in the immediately preceding months. WTI futures even entered negative territory in April, which made for memorable headlines, though the latter was admittedly due to a technicality related to the physical delivery settlement of such contracts. Since then, oil prices have moved considerably up and appear likely to sustain their upward momentum in the short run, given the overall supply situation. Most recently, we have also been seeing mounting pressure on the price of natural gas as well, particularly with respect to Europe. Europe relies heavily on natural gas not merely for heating but also for its electricity generation. Coal power plants have been scraped and replaced with alternative renewable sources. However, this process would have been unthinkable without using natural gas to supplement renewables when necessary. The predicament comes from the fact that Europe has very little natural gas deposits of its own and relies heavily on imports. To make matters worse, within the context of the global gas supply chain, most competitive gas exports are first routed toward other regions of the world, such as China, for instance. Europe generally gets to buy last whatever is left after everyone else has bought. A good part of the natural gas supplies for the continent come from Russia, which has brought about geopolitical tensions in the past. Rising natural gas prices are already reflected in surging electricity bills for households across Europe and this makes the situation all the more tense for political decision makers, as rising electricity and oil prices are likely to translate into sustained higher inflation rates. Some commentators have sardonically borrowed the term “greenflation” to describe this. The term was coined by billionaire and philanthropist Bill Gates in his…

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