The poor second-half performance for oil coincided with China’s continued struggles to reinvigorate its economy. World oil demand grew last year and is projected to grow further this year, and preliminarily, grow additionally in 2025. What hurt oil prices late last year was oversupply as Chinese demand failed to materialize as expected.
OPEC+ members continued controlling oil prices by restricting their production. The group had extended their initial cuts numerous times to keep oil prices from falling too low. The latest extension holds OPEC+ output down through mid-year.
What is becoming more evident, however, is how oil prices have not been considering supply risks due to geopolitical events that are real. The Russia/Ukraine war continues to drag on, but with signs that Russia is gaining momentum, while it threatens to upscale the conflict should Europe and the US escalate support for Ukraine.
The latest geopolitical issue is the growing use of drones by Ukraine to strike at Russia’s oil infrastructure. Ukraine has been frustrated, as have many in the West, over Russia’s ability to evade oil industry sanctions whose revenues are funding the war. Ukraine’s drones have demonstrated they can strike potentially 60 percent of Russia’s refinery and export capacity. Ukrainian drones have also hit Russian oil shipping ports. So far, Ukraine has hit seven major Russian refineries causing damage and fires, which have reduced output volumes. We do not know if the reductions are temporary or permanent. Losing some or all of Russia’s oil exports would immediately panic the global oil market sending prices soaring.
The ongoing attacks on shipping in the Red Sea by Yemen’s Houthis have forced almost all vessels to sail around Africa adding to global bunker fuel demand and extending cargo deliveries by weeks. The bunker fuel demand increase forced the International Energy Agency to boost its oil demand forecast for 2024 to be closer to OPEC’s projections. The IEA’s revised forecast has the global oil market falling into a shortage in the second quarter rather than during the second half of 2024. As the market digests these developments, the oil risk premium is re-entering the pricing equation.
The oil industry continues adhering to strict capital discipline, so exploration and development expenditures are being throttled back while dividends and share buybacks continue. This reinforces the prospect of tighter oil markets in the future, even when OPEC+ eliminates its production cuts. The oil and commodity cycles are
regaining their mojo.
Oil prices reflecting greater geopolitical risk premium and commodity cycle revival.
NATURAL GAS
In mid-March, the natural gas market experienced its first weekly injection into storage for 2024. Warmer temperatures in the first half of March contributed to the early start of the gas injection season. The second half of March has experienced several large snowstorms and cooler weather nationwide than expected, and certainly unexpected after the warm weather in the first half of the month. This weather has contributed to sending gas prices into the basement. The outlook does not suggest much of a recovery in the near term.
Our two natural gas charts demonstrate the weak gas market. For most of 2024, natural gas storage has been above or only slightly below the 5-year maximum storage. The market entered 2024 with a surplus over the 5-year maximum of 80 billion cubic feet (Bcf) which has grown to 300 Bcf at mid-March. Unless something changes, the gas storage surplus will grow.
Estimating how much the storage surplus may grow depends on the weather—heating or cooling needs for natural gas. For the week ending March 15, heating degree days nationally were 121. However, that was 36 HDD below normal and 49 HDD below last year. That explains the gas storage injection—a lack of heating demand. As we move into the Easter Season, snow and cold temperatures are sweeping across the upper tier of the US. That should provide some support for gas consumption and prices. However, any gas price support coming from the colder-than-normal temperatures will dissipate as the nation heads into the spring “shoulder” months for gas demand when the absence of heating and cooling needs boost gas consumption. Thus, gas prices will swing on liquefied natural gas export volumes and gas production growth.
The latest weekly gas data shows production remaining high—101 Bcf/day. Fortunately, it is not rising. It has been flat for the last year. That offers a glimmer of hope for better gas prices. However, LNG exports are not rising. National export volumes are being held down by the continued operating restrictions at the Freeport LNG terminal, south of Houston, Texas. It has been operating at reduced levels since mid-January following a winter storm incident and anticipates operating with only one liquefaction train until May. The good news is that gas prices in The Netherlands and Asia are up from a year ago signaling there remains healthy international gas demand. Prices in those international markets are about $13.50 per thousand cubic feet, while here, Henry Hub prices are about $1.50.
The natural gas market is in the basement, but it has been there before, yet recovered. This market will recover, too. We just don’t know when.
Too much gas in storage has driven gas prices to basement levels.
This story was originally featured in ON&T Magazine’s April 2024 issue. Click here to read more.
