When you pick points in time to measure oil price performance, you are at risk of unusual events distorting views about the health of the oil market. Our accompanying oil price charts show the volatility of WTI prices for May and so far in 2023. The year-to-date price chart ends on May 31, which misses oil price changes during the first two days of June that closed out that week. When trading ended on Friday, June 2, WTI was $3.65 a barrel higher, up 5.4 percent. That jump put WTI at nearly $72— well within the price range for most of May. While the June 2 price was below the 2023 year-to-date average of $75.69 a barrel, it is a healthy price for producers, and tolerable for consumers.
Recently, Robert McNally, the head of Rapidan Energy Group, a Washington, D.C. consulting company, laid out the long-term bullish case for oil. The thesis is simple: price-inelastic demand growth will exceed price-inelastic net supply by a large margin and oil prices will need to rise sharply to ration the available supply. The oil boom McNally foresees will only come after we deal with the macroeconomic headwinds buffeting oil markets currently and likely will continue for the next 3–6 months. The primary headwind is the question of a recession. When and how deep are unknown. The latest strong labor market data has some strategists believing we are headed for a “soft-landing” or no recession at all. Those possible scenarios would be good for oil demand and continue the growth that defies the doom-and-gloom forecasts of oil’s impending demise.
McNally discussed the challenge of Russian oil production within the global oil market. The West’s sanctions on Russian oil due to the Ukraine war have had less impact on global oil supplies than predicted. Once beyond the recession headwind, McNally foresees the Russian oil production issue becoming a non-event as global demand overwhelms supply, especially as drilling remains weaker from the lack of industry spending.
McNally’s greatest worry is our growing debt, exacerbated by rising entitlement and pension spending that he believes will cause governments to target the profitable oil industry for additional tax revenues. This threat, in his opinion, is greater than concerns over climate change leaving the oil industry with stranded assets. In McNally’s view, we must taste the bitter before the sweet.
NATURAL GAS
With the natural gas storage injection season well underway, weekly builds are growing. From 75 billion cubic feet injected into storage during the first week in May, by the end of the month, it was at 110 bcf. Because last winter was so mild, gas storage volumes began rebounding well before the end of the withdrawal season. At the end of May, gas storage was 17 percent above the five-year average and 29 percent above 2022’s level. The rapid storage build explains why natural gas prices remain weak.
At the end of May, Henry Hub gas prices were $2.26 per thousand cubic feet, which is up from the $2 level seen at the end of March. To better appreciate the warm winter’s impact on US and global natural gas markets, one only needs to note that today’s gas price is just 28 percent of the $8.15/mcf price on May 31, 2022. Global gas prices are down substantially due to the warm winter, which allowed Europe to refill its storage caverns and end its furious pursuit of liquefied natural gas cargos. Asia also consumed less gas last winter, so its LNG demand has moderated.
To say the natural gas market has been a huge disappointment would be an understatement. The disappointment has played out not only in prices realized but in drilling activity, too. Since the beginning of the year, the Baker Hughes drilling rig count has seen 19 fewer gas-oriented rigs and 66 fewer oil-oriented rigs working. Combined, the 85 drilling rig decline represents 11% fewer active rigs than at the start of 2023. People might wonder why the oil rig count declined this year, but it was a combination of the volatility in oil prices discussed above and the impact of low gas prices on the associated gas output from oil wells that made drilling them marginally profitable. With the petroleum industry focused on financial discipline in its capital spending, the collapse in natural gas prices has curtailed drilling activity.
Drilling fewer gas wells, coupled with the natural 4–5 percent annual output decline from producing wells, will eventually restore the balance between supply and demand. A hotter summer, a hurricane destroying some of the US gas industry infrastructure, and prospects for a colder-than-normal winter could all tighten the gas market and boost gas prices, but none is a certainty. Regardless, the world will continue consuming more gas because it is a cleaner alternative to dirty coal. Currently, gas market headwinds are strong, but they too will eventually shift to tailwinds. Patience is the key.
This story was originally featured in ON&T Magazine’s June 2023 issue. Click here to read more.
