Energy markets are moving once again. A colder than expected winter hit Europe, so natural gas prices are on the rise as a result of increasing demand. On the other hand, oil prices took a dip as US rig count continues to increase due to the OPEC agreement. It seems that both the natural gas and the oil markets will see more volatility in 2017.
Oil and gas are close substitutes
To reduce exposure to price volatility in both markets, consumers could consider systems that would let them use either oil derivatives or natural gas to produce energy. Some drivers in certain countries for example, chose to upgrade their engines so that they could run on natural gas when oil was expensive. Given the fact that the price of oil is dipping and that the OPEC agreement will probably not yield the desired results in the market, some consumers might want to consider an oil derivative based solution for their gas-powered infrastructure.
US shale can affect both markets
The oil glut might not disappear this year. It seems that every time OPEC’s deal starts to have an effect on oil prices, US producers add more rigs and the gains evaporate. Meanwhile suppliers are finding it hard to get more gas into European markets. US shale and LNG technology can play a role in alleviating the demand from Europe, but if this continues, at some point it would make more sense to switch to oil derivatives.
The winter and investment in exploration hold the key
To understand how to handle all the variables to understand which source of energy is the best one to buy at any given point in time, it is necessary to keep an eye on winter temperatures and investment in oil and gas exploration. Winter temperatures have proven hard to predict, but investment in oil and gas exploration is merely a function of projected oil and gas prices. In the meantime, given the fact that the OPEC deal is being offset by US shale producers, investment in exploration will probably lag some more.
Long term prices
This means that the oil glut will last longer than expected, but once it starts disappearing it will do so quickly. In the meantime, gas prices will fall because the end of winter is 3 or 4 months away. That means that consumers might have an advantage in switching to oil derivatives in the short term, while switching back to gas in the longer term.