Do Oil and Power Prices Move in Sync?
Power and oil prices have been increasing together as of late as opposed to last year when power and oil prices were stagnant due to the pandemic. As such, power generators and petroleum producers have benefitted, while consumers may pay higher prices.
On Reddit, several users are talking about how power and oil prices are set to continue to increase this year.
Below, we will go into why power prices have increased this year, how they are related to oil prices, what affects oil and gas prices and other relevant queries.
Reasons for higher electricity prices in North America in 2021
With various COVID-19 vaccines being distributed to the USA and Canada, coronavirus shutdowns are expected to ease, meaning businesses will be able to open the doors again and resume normal operations. Presumably, this would equate to a gradual return to pre-COVID-19 levels of electricity use and a higher cost of electricity.
Additionally, extreme weather conditions cause increased electricity prices in both Canada and the USA. More specifically, the winter storm in Texas caused Texas electricity prices on the power grid to spike more than 10,000 percent due to severely increased demand, according to an article from the CBC. Henry Hub natural gas futures jumped 7.4%, gasoline futures advanced almost 5% while crude oil futures advanced 0.98%. In addition to increased demand, frozen pipelines also contributed to higher prices due to reduced supply.
In February 2021, extremely cold weather in Alberta saw a record amount of power used in comparison to last year – 11,729 MW – alongside increased electricity and natural gas prices.
Lastly, although not specific to 2021, both the USA and Canada are making moves towards transitioning to cleaner energy – renewable energy sources can still be slightly more expensive, as well as creating the appropriate infrastructure and facilities.
Reasons for higher oil prices in North America in 2021
The COVID-19 vaccine distributions also affect oil prices – business activity will resume, and demand will be created for refined petroleum products. Market analysis by Wood Mackenzie predicts that the world demand for oil will increase 6.6 million barrels per day year-on-year in 2021 – thus strong oil demand growth will help support high oil prices in 2021.
As with electricity prices, oil prices can also be connected to severe weather events, such as the winter storm in Texas that left millions without power.
How are natural gas and oil prices related?
To answer this question, we’ll first examine where oil and gas are sourced from. Natural gas comes from three different types of wells: associated, non-associated and condensate wells. In associated wells, natural gas is a by-product and oil is the main resource. In non-associated wells, natural gas is the main resource, sometimes alongside a small amount of oil. Condensate wells produce natural gas as well as natural gas liquids.
Since companies dealing with natural gas and oil production often produce both, the pricing of one resource often affects the other. For example, if we think about natural gas that comes from an associated well, an increase in oil prices could mean consequent increased natural gas production and lowered natural gas prices.
However, the opposite may also be true. In another example, rising oil prices may mean an increase in oil drilling and decreased natural gas drilling (especially in non-associated wells), meaning natural gas prices rise.
Another thing to think about is fuel substitution – there are refined fuels made from crude oil that can be used as a substitute for natural gas. Which one will be used depends on natural gas vs oil prices – if there are higher oil prices, companies may substitute petroleum products for natural gas whenever possible. In turn, however, this causes natural gas demand to increase and consequently, natural gas prices increase. At that point, companies would choose to substitute crude oil and crude oil products (due to low or lower oil prices) for natural gas and so on and so forth.
How can this upward trend affect prices for average consumers?
For consumers who are on floating rate plans, they will almost certainly see increases in the amount they pay on their power bills, as floating rate plans are directly affected by world events and extreme weather changes. In other words, they can expect to see increased pricing per kWh of electricity used or GJ of natural gas used.
On the other hand, consumers on fixed-rate plans will probably be impacted less as they pay a fixed amount per kWh of electricity or GJ of natural gas.
What is the forecast for oil prices in North America? When will oil prices recover?
An article from Forbes predicts that the average price of Western Texas Intermediate in 2021 will be between $50 per barrel and $55 per barrel, up from an average of $39.16 per barrel in 2020.
However, this average price prediction depends on how quickly the COVID-19 pandemic is brought under control. If the new variant strains of COVID-19 aren’t covered by existing vaccines, or if the pandemic takes longer than expected to get under control, oil prices could be expected to go back beneath $50 per barrel. If the pandemic is brought under control relatively quickly, oil prices could recover to over $55 per barrel.
So while there could be a market rebound for oil prices, it’s still too early to say for sure.
Did the pandemic affect power and oil prices?
Overall, the COVID-19 pandemic has affected both power and oil prices. In efforts to slow the spread of COVID 19, several countries (including Canada and the USA) imposed travel restrictions and stay-at-home orders. As a result, this reduced demand for crude oil products like gasoline, diesel, and jet fuel. Additionally, power demand was decreased as a result of businesses like shopping malls and restaurants closing their doors in response to public health orders.
In April 2020, extremely low oil prices (as a result of the pandemic as well as a disagreement between OPEC countries and Russia) caused a partial shutdown of operations and production shut-ins for many companies, causing a decrease in power demand in Alberta’s industrial sector, according to the Canada Energy Regulator.
As for the United States, further reductions in demand for refined petroleum products (produced from crude oil) occurred as a result of a national emergency being called on March 13th, 2020. Prices for West Texas Intermediate crude oil fell to $30/b in March, all the way from $58/b in January.