Energy Prices Aren’t Coming Down Soon

Key Takeaways

• Russia’s possible invasion of Ukraine has kept a floor under natural gas prices. U.S. exporters are taking advantage by selling products to Europe at higher prices.
• Demand for energy far outstrips supply. And demand isn’t likely to drop just because prices increase.
• The current environment is bullish for oil and gas exploration companies in the U.S.

British Petroleum’s CEO didn’t mince words.

“What we can expect is volatility over the coming months and years.”

Russia’s Impact

With Moscow threatening to invade Ukraine and tight supplies, natural gas prices skyrocketed in January and early February only to quickly drop back down to more moderate levels.

What makes this issue particularly sticky is Europe’s reliance on Russia for a huge amount of energy.

Plus, Germany’s Nord Stream 2 pipeline is in jeopardy and may not come online, putting further strain on energy prices.

Stateside, U.S. natural gas exporters like Cheniere (LNG) have been kicking out record volumes to supply European markets at higher prices.

Oil Prices Are Stuck

Pain at the pump is hitting drivers across the globe as oil inventories sit at low levels.

With economic activity surging, we’re unlikely to see oil prices decline even after the Fed hikes rates. Instead, the world needs more supply to combat the problem.

And OPEC+, the oil oligopoly, is sticking to their output schedule.

However, higher prices make drilling in the U.S. more lucrative. That’s leading to huge volumes pumped through master limited partnership stocks (MLPs) like Kinder Morgan (KMI) and Energy Transfer (ET).

The Fed Won’t Help

You know how Core consumer inflation (CPI) excludes food and energy? That’s because prices for those two commodities tend to swing around a lot.

Yet, demand for them remains pretty constant. It’s not like we suddenly eat or drive less because prices rise. We still have to get to work and…well live.

However, as Paul Volker, head of the Fed in the early 80’s showed us, if you jack interest rates up enough, you will eventually drive down demand for those commodities, curtailing inflation.

Don’t expect that to happen this time around.

The Bottom Line: Energy prices aren’t likely to drop until supply increases. That’s bullish for oil and gas companies like Exxon Mobil (XOM) and Conoco Phillips (COP).

What will change that equation? Higher output from OPEC+ countries or the U.S. drillers.