About the surging energy prices

Will the surge in natural gas prices last?

Natural gas prices in Europe and Asia have increased more than twenty-fold from record lows during the summer of 2020. In this commentary, Pescatori et al. argue that the persistence as well as the global dimension of these price spikes are unprecedented.  But energy futures markets indicate that natural gas prices are expected to normalize by the second quarter of 2022 as seasonal pressures in Europe and Asia ease.

Surging Energy Prices May Not Ease Until Next Year
By: Andrea Pescatori, Martin Stuermer, Nico Valckx – IMF

Are energy futures reliable?

In terms of prediction, futures outperform a random walk, correctly predict direction-of-change more often than random chance, with statistical significance. Out of sample, futures don’t do any worse or better than a random walk. In sum, the fact that energy futures are pointing downward is reassuring. However, one should not rely too much on the idea that future spot prices will go down as far as implied by futures.

Energy Futures and Future Energy Prices
By: Menzie Chinn – University of Wisconsin-Madison

How about the surge in oil prices?

Brent crude oil prices, the global benchmark, recently reached a seven-year high of above $85 per barrel. The chart below shows, after the oil price collapse in the spring of 2020, Brent crude oil prices recovered very cautiously, as the demand outlook remained muted. Then, toward the end of 2020, oil prices headed into an upward trend, as expected demand was revised upward while expected supply was revised downwards. The increases in 2021 through the end of the summer largely reflect upward revisions to demand expectations. In particular, from July 2020 to January 2021, the six-month cumulative change in the expected demand component of oil prices rose from -8 percent to 22 percent. January 2021 though signaled the peak as the six-month cumulative growth in the demand expectations component of oil prices, went down to 11 percent in August. With growing uncertainty about global growth will oil prices stabilize or reverse trend?

Oil Prices, Global Demand Expectations, and Near-Term Global Inflation
By: Jan J. J. Groen, Adam I. Noble – Federal Reserve Bank of New York