The bullish case is based on global demand continuing to grow, while the industry’s fidelity to capital discipline, coupled with the recent period of low oil prices that discouraged exploration for new reserves, keeps supply limited and oil prices elevated. They believe it will be years before supply swamps demand. On the other side, the bears believe we are at peak oil demand as the world slips into a slower growth phase with potential recessions further eroding consumption. Importantly, they are convinced the world will rapidly transition away from hydrocarbon use making oil and gas assets stranded and worthless.
Since the pandemic started in early 2020, oil prices have been on a roller coaster. When economic lockdowns began, oil demand collapsed sending oil prices briefly below zero as the industry struggled to shut down its global supply chain. With COVID-19 coming under control, economic activity recovered, along with oil consumption. Oil prices followed economic activity. In late 2021, economic growth accelerated, and oil consumption surged along with oil prices.
Climbing oil prices were supercharged in early 2022 when Russia invaded Ukraine creating an energy shock the world had not experienced since the 1970s. Oil prices soared to $120 a barrel, but soon retreated, finishing 2022 in the high $70s as the worst supply fears failed to materialize. Not surprisingly, energy was the best-performing investment sector in 2022.
The super cycle debate in early 2023 was framed by the energy transition and recession fears against evidence industry investment was lagging as returning capital to investors took precedence, demand grew faster than expectations, and supply was under control. Healthier world economies need more energy. However, the economic growth surge expected from a reopened China failed to materialize as anticipated. The stumbling economic data fueled uncertainty about oil demand, thus oil price volatility increased. After crashing into the mid-$60s this summer, OPEC+ leaders Saudi Arabia and Russia organized production cuts to better control supply and tighten oil markets. Economic growth outlooks are strengthening with recession fears dissipating along with global oil inventories. Refined product demand strengthened, elevating their prices which helped pull up crude oil prices.
Oil prices were positive in July, and surprisingly soared in the final days of August, producing a second consecutive positive month. Oil prices closed in August knocking on the door of a technical price resistance level, only to jump over it on the first day of September. OPEC+ supply discipline remains strong, supporting further oil market tightening.
Having breached the price resistance level, oil prices may climb to the next resistance level in the mid-$90s. Everything is not clear, but industry trends and discipline amongst all the players suggest this fall will be a fun time for energy companies and investors.
NATURAL GAS
Our focus on the natural gas market is all about heat and liquified natural gas exports. The latest weekly report (ending August 25) shows 3,115 billion cubic feet of gas in storage, 484 Bcf above the same point last year and 249 Bcf above the 5-year average. As the accompanying storage chart shows, 2023’s storage volume, which tracked close to the 5-year average maximum volume has fallen close to the middle of the range. The slippage reflects the impact of increased heat on air conditioning demand and the increased electricity needed. The media has stories of grid operators
imploring residents to conserve their electricity usage. For some utilities, it means instructing people not only to raise their thermostats by 2-3 degrees and not cook but also to not charge electric vehicles until night when electricity demand eases.
Although the weekly gas storage increases were low throughout August, the nation is not at risk of having inadequate supplies when winter arrives. Additionally, natural gas production continues growing adding to supply. What will be important for storage heading to the start of winter is that gas prices are high enough to entice producers to inject supplies rather than sell them for current consumption or export.
Looking at our natural gas pricing chart, weekly prices peaked ($2.80 per thousand cubic feet) in mid-August before settling back ($2.55) at the end of the month. As the chart shows, the peak price was bumping up against the resistance level that existed for 2015–2020. The interim pandemic period was marked by the Russia/Ukraine war that created a European gas crisis that was alleviated by US LNG exports but at substantially higher prices. Once the European gas crisis was averted, prices retreated as growing US supplies overwhelmed demand helped by the unseasonably warm 2022–2023 winter.
What’s the outlook for the gas market? The Farmer’s Almanac winter weather forecast is titled “The BRRR is Back!” Its accompanying chart shows Cold in five of the nation’s seven regions. The other two regions—Southwest and Southeast—were labeled with Wintery Temps and Chilled. If their forecast comes to pass, gas demand will be greater than last year, which will boost prices to attract storage volumes during the winter and begin refilling the caverns in 2024.
We have written about LNG export terminal expansions and additions. The US is on the road to becoming the globe’s largest natural gas supplier which will support demand and gas prices. Furthermore, we are building new natural gas generating capacity to meet increasing electricity demand and to back up intermittent renewable power. Natural gas plants are also replacing coal plants to reduce our carbon emissions.
Natural gas markets will remain dependent on the weather not just in the US but also around the world as we become the largest LNG exporter. Gas prices have probably seen their lows for a while.
This story was originally featured in ON&T Magazine’s September 2023 issue. Click here to read more.
