MarketWatch: Weathering the Storm

The fourth quarter of 2023 was a disaster for oil. During the quarter, WTI prices fell by 21 percent, dropping nearly $20 a barrel from about $91 to slightly under $72. WTI briefly fell below $70 in December as sentiment reflected expectations that global oil demand was not increasing while supply was surging ensuring a glut of oil.

As a result, energy stocks were the worst-performing market sector in each month of the fourth quarter leading to the sector being the second-worst performer for all of 2023.

Demand’s problem was centered on China and its ongoing economic challenges. The Chinese oil demand rebound from the pandemic shutdown era failed to materialize as strongly as anticipated. OPEC+ members were forced to cut production to support oil prices. What was believed to be a temporary step appears to have become a long-term commitment. In the second half of 2023, oil traders began betting against Saudi Arabia, believing it would eventually tire of supporting prices by cutting its output and income. That is the history of prior attempts to control the oil market.

A problem is continued US oil output growth. Today, the US produces more oil than any country in history. The surprise for market watchers has been the growth of US oil output in the face of strong financial discipline by producers, along with the continued harassment by the Biden administration.

Recently, oil prices began climbing as experts sensed a shift in market dynamics. In 2023, according to the International Energy Agency (IEA), global oil demand grew by 2.3 million barrels per day, but it slowed to a 1.7 mmb/d rate in the fourth quarter. The agency forecasts global oil demand growth of only 1.2 mmb/d this year. However, it raised its forecast by 180,000 barrels per day in its most recent report. Does this hike foreshadow further demand increases as 2024 progresses?

The greatest oil market challenge is supply growth. The IEA sees a 1.5 mmb/d increase with most additional supply coming from non-OPEC+ countries, in particular, North and South American countries. The IEA outlook suggests little pressure for higher oil prices. But recently, the US Energy Information Administration projected that after a 1 mmb/d output increase in 2023, the US oil supply will only grow by 200,000 b/d in 2024, with a similar increase in 2025. Could that bring the market into balance sooner than the traders betting against higher prices expect?

With projections of 2024 oil industry capital spending growing by low single digits or possibly even declining, could the supply growth forecasts be overstated? This issue has been a key piece of the oil super-cycle investment thesis—limited investment crimps supply growth while demand steadily rises, which pushes up prices. Higher prices are needed to generate increased supply. This debate will dominate the 2024 oil market discussion. Sentiment swings will impact oil prices. Currently, the needle is pointing higher, and before adding any premium for the Middle East and South Pacific geopolitical risks.

Natural Gas DITTO

Winter is defining the natural gas market—like it always does. The polar vortex that swept down from the Arctic and across the US from the Rocky Mountains to the East Coast and down to the Gulf of Mexico sent natural gas prices up. On the last trading day of 2023, gas futures closed at $2.51 per thousand cubic feet. Eleven calendar days later they were 27 percent higher at $3.19. Three days later prices were $3.31. Extreme cold does that to prices.

The bitter cold temperatures had cities as far south as Dallas experiencing 10-12 degree Fahrenheit lows for three consecutive days with wind chills of zero or below. The Electric Reliability Council of Texas issued warnings about the need to conserve power to prevent a blackout. Although temperatures failed to reach the lows experienced in 2021’s Winter Storm Uri, natural gas carried the load in generating power as wind and solar were largely absent. The same scenario happened elsewhere.

With power and home heating demands soaring in response to the record low temperatures, gas storage volumes were drained. After three weeks of winter so far, nearly all the surplus gas storage at the start of 2024 is gone, putting the gas market’s future dependent on the weather during the rest of winter.

We ended 2023 with 553 billion cubic feet of extra gas in storage than at the end of 2022. That cushion shrank to only 110 bcf in three weeks. Cold weather drove up gas consumption but it also impacted production, which was about two billion cubic feet per day below the same point in 2023. The output decline is more pronounced when one considers that US gas output peaked in December at 105 bcf/d but averaged only 99 bcf/d so far in January. Forecasts call for gas production to grow by 1.5 bcf/d, or between 1–2 percent this year, but sharply lower than the 4 bcf/d increase in 2023.

The biggest natural gas story is the Biden administration’s recent decision to pause the approval process for new liquefied natural gas (LNG) export plants. Ostensibly the pause is to enable the Department of Energy to “take a hard look at the impacts of LNG exports on energy costs, America’s energy security, and our environment.” However, the LNG pause is seen as a blatant political move to “buy” the votes of younger Americans more concerned about the environment than their lifestyles, energy security, and international standing.

While this step doesn’t impact terminals already approved or under construction, it has shaken our allies who wonder if they can trust US LNG supply. The supply of LNG, which burns 80 percent cleaner than coal, could be capped long-term and undercut the push to decarbonize the global energy system. The energy market has become a political football this year as the presidential election campaign begins. 

This feature originally appeared in ON&T Magazine's January/February 2024 issue. Click here to read more.