{"id":106281,"date":"2021-10-08T10:15:00","date_gmt":"2021-10-08T14:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=106281"},"modified":"2022-11-21T09:48:18","modified_gmt":"2022-11-21T14:48:18","slug":"big-moves-in-energy-markets","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/commodities\/big-moves-in-energy-markets\/","title":{"rendered":"Big Moves in Energy Markets"},"content":{"rendered":"\n

Volatility in the crude oil and natural gas markets<\/strong> has been a big topic among investors and policy makers recently. Limited supplies and higher demand are pushing prices higher, and stock prices in the Energy sector are responding.<\/strong><\/p>\n\n\n\n

The chart below helps put recent movements in perspective, seen in the context of the last five years. Crude oil prices<\/strong> (second section, in red) have just recently topped their 2018 peak, completing a full recovery from the COVID-related drop and weakness that preceded COVID. But the five-year average for crude oil has been about $55\/bbl, with a low of $25 (on this measure, which uses an average of the next 12 months of crude oil futures contracts to avoid near-contract distortions) and a current high of $76. So crude is elevated but not at an extraordinary level<\/strong> given it was at about the same price in October 2018. And it reached much higher levels above $100\/bbl. back in 2008, 2011, and 2012.<\/p>\n\n\n\n

\"energy<\/figure>\n\n\n\n

Source: Mill Street Research, Bloomberg, Factset<\/em><\/p>\n\n\n\n

US natural gas prices<\/strong> (third section, in grey) have been more dramatic recently, jumping to about $6\/MMBtu, about double the five-year average<\/strong> of just under $3\/MMBtu. It is also well above the late 2018 peak, and at a similar level to a spike that occurred in the winter of 2014.<\/p>\n\n\n\n

But if US natural gas prices look worrisome, the movements of natural gas in Europe make US prices appear downright dull by comparison. Natural gas futures in Europe (bottom section, in purple) have skyrocketed to the equivalent of over $30\/MMBtu<\/strong> (gas futures are priced in euros per megawatt-hour in Europe so we have converted the prices to the US standard of millions of BTUs and converted the euro price to US dollars for comparison). The five-year average price in Europe before the latest surge was slightly below $6\/MMBtu (gas is typically more expensive in Europe due to more limited local supplies).  So current prices are about five times the normal price in Europe<\/strong>. Natural gas is costly to liquefy and ship overseas, so there is only modest scope to arbitrage the price differences between the US and Europe.<\/p>\n\n\n\n

The top section of the chart shows the relative performance of US S&P 500 Energy sector stocks relative to the S&P 500 index. Energy stocks outperformed from November through March in the initial move driven by the announcement of the Pfizer vaccine. They then showed mixed performance and lagged somewhat until mid-September when oil and gas prices started jumping and they have outperformed sharply<\/strong>. But over the longer five-year time frame, Energy stocks\u2019 relative performance is still far below its levels from even 2019, and even more so from 2016.<\/p>\n\n\n\n

What are some of the drivers of the jump in oil and gas prices? The situation is naturally complex, and global, but a few key elements are:<\/p>\n\n\n\n