The crude oil market is struggling to decern where the global economy is heading. Recession, soft landing, or blue skies? Investors, economists, business executives, central bankers, politicians, and families are all concerned. Each alternative economic trajectory means actions must be taken. If each party reaches a different conclusion and acts on its belief, economic outcomes may be worse than what they expected.
Each of the above scenarios produces a meaningfully different oil demand outlook—sharply down, flattish, or a healthy increase. If you are an oil minister or oil executive planning your future production and selling prices, what decision do you make? A wrong one could be financially painful for your country or company, but an equally wrong choice might be painful for millions of consumers.
Over the past century, oil supply and demand shifts have created industry booms and busts. Neither is good, although a select group benefits and wants its bounty to continue. But that is not how markets work. Supply and demand fundamentals combine to correct booms and busts. The past two decades have seen the global oil industry respond to the China economic miracle of the 2000s, the American oil shale revolution of the 2010s, and the pandemic economic shutdowns and rebounds of the 2020s.
What has emerged from this history is a belief among producers, consumers, and investors that stable prices are better for the industry’s financial health and the assurance of adequate oil supplies. We are essentially returning to a past era dominated by the Seven Sisters when a handful of leading global oil companies tacitly agreed to steps to stabilize oil markets and thus oil prices. Today, OPEC+ has replaced the Seven Sisters, although a few large oil producers dictate market adjustments.
As frustrating as a range-bound oil price is, especially for traders and investors, the the range provides prices nearly everyone can live with and adjust to. A chart of oil prices this year looks like a series of moguls that skiers enjoy, although lacking the thrill of downhill or giant slalom runs. The thrills carry the risk of disaster, and many oil industry players are opting for boredom over terror.
NATURAL GAS
The verdict is in—it was a warm winter and natural gas prices suffered. We are now in the early weeks of the gas injection season and the storage is growing. An analysis of winter demand explains why natural gas prices fell from $5.71 per thousand cubic feet on November 1, the start of the withdrawal season, to $2.22 on March 31, the end of winter. That is a 61 percent drop!
Gas investors were very optimistic about the winter of 2022–23 with exports to a gas-starved Europe soaring following the continent’s loss of access to its cheap supply of Russian gas driving expectations for sustained high prices. US E&P companies ramped up drilling and production, so with elevated prices, it looked like a good final 2022 quarter for profits and a positive 2023 start.
On November 1, 2022, natural gas storage was three percent below the 5-year average winter starting volume. Due to the warm weather and surging gas production, storage ended the season 19 percent above the 5-year average ending volume.
What crushed natural gas prices was production growing by 5.5 percent (+5.2 billion cubic feet per day). However, natural gas consumption grew by only 1.7 percent (+1.6 Bcf/d), despite gas consumed in generating electricity increasing by 9 percent. The latter’s growth reflected cheaper gas undercutting coal prices—its primary competitor—in the power generation market. Not only did it help keep consumer electricity bills down, but cleaner natural gas helped reduce carbon emissions.
Regional temperature differences further illustrate the sensitivity of gas prices to demand. Areas west of the Rocky Mountains, including the Mountain and Pacific regions, experienced colder temperatures this winter. Heating degree days were 23 percent above normal in the Pacific region and 12 percent above in the Mountain region. More heating demand resulted in Pacific region gas storage volumes finishing the winter season 57 percent below the five-year average—a record low.
For gas investors, the only good news—and it will be a significant positive for the long-term—was the final government approval of two new liquefied natural gas export terminals. The projects had been approved in 2019 but were held up by the courts that demanded additional environmental and community assessments. One project, Rio Grande LNG in South Texas, still faces battles from environmentalists, but with FERC’s final approval, construction can begin. The second terminal, Tellurian’s Driftwood LNG, still must reach a “final investment decision,” which requires firming up financing, partner roles, and contracts, all of which are expected to be completed this summer. Positive movement on these new projects will provide additional gas export opportunities that will tighten the gas supply/demand outlook and should support higher gas prices.
This story was originally featured in ON&T Magazine’s May 2023 issue. Click here to read more.
