Iran’s threat to retaliate drew swift warnings from the US and other Western governments urging moderation. World leaders worry Iran’s response might trigger a wider regional conflict.
So far, the deaths and retaliation threats have only created brief oil price spikes. After spiking, oil prices quickly retreat, often falling below where they were before the actions. So far, no war has constrained oil prices.
Traders continue to wrestle with the weak oil demand data and uninterrupted oil supply scenario. Realistically, roughly two million daily barrels of oil production sits on the sidelines as OPEC manages global supplies. The inability of OPEC to bring this supply back into the market this year has frustrated oil bulls. Less robust global oil consumption remains the anchor keeping oil prices from rising significantly. Without a demand pickup, fears that OPEC will start adding supply in early 2025 are capping oil prices.
Global oil demand continues to disappoint, especially given that economic data shows most countries are performing well. However, more recent data shows major economies faltering. Politician demands for economic stimulus programs will grow. Oil demand could switch from soft to robust quickly with faster economic growth.
For example, Japan’s central bank has begun a more aggressive program to lift the country’s economic activity. In the US, the recently revised employment growth figures for March 2023 to March 2024 may achieve the same feat. The fact that 818,000 fewer jobs were created than previously thought is putting pressure on the Federal Reserve to cut interest rates aggressively to pump up economic activity.
Surprisingly, all the bad economic and geopolitical news has only pushed oil prices down to long-standing support levels. Such a market response suggests oil prices are merely range-bound awaiting a catalyst to spark a move up or down. Will it be a geopolitical event or an economic stimulus program? Maybe we are destined for oil prices to continue their seesawing within a range-bound market for the rest of 2024.
Oil prices remain range-bound while production hits a new record.
NATURAL GAS
In early August, near-term natural gas prices fell below the $2 per thousand cubic foot level as supply overwhelmed demand. Eventually, futures prices recovered. At around $2.20/Mcf, they are 14 percent below a year ago levels and 30 percent lower than mid-June’s peak.
Outside the 2020 Covid crash, gas prices haven’t been this low since the 1990s. Fortunately, winter futures prices are starting to work their seasonal magic. More demand means higher prices. However, prices have yet to reach the levels producers desire because of concerns the upcoming winter may be mild.
Although the heat has been high throughout the Southwest and in several other regional pockets in August, the gas supply has been adequate. The prospect of possibly another mild winter is increasing the focus on gas supply.
Natural gas production peaked at 105 billion cubic feet per day in December. Winter demand, dampened by a mild winter, led to an oversupply of gas and a price crash in the spring. Domestic gas producers were forced to reduce their production to support prices.
More recently, Hurricane Beryl caused millions of Texans to lose their electricity for weeks. That cut back the demand for natural gas to generate electricity, although residents with backup gas generators (yours truly) did boost demand somewhat, however, the volume was small. Beryl also hurt gas takeaways at LNG plants, further cutting demand, boosting gas supplies, and pressuring prices.
Surprisingly, the weekly gas storage figure dipped under the five-year high levels. Still, current storage volumes are 12 percent above the five- year average. That is an improvement from the 41 percent surplus seen in mid-March. The improvement reflects increased gas demand from the summer heat and production cutbacks.
Gas producers indicate they are not increasing, and are cutting their capital spending in response to the low gas prices. These actions reflect producer commitments to financial discipline principles shareholders demanded following the 2015 oil price crash. The impact of these cutbacks and disciplined spending is shown by the decline in gas- directed drilling rigs. There are now only 98 rigs drilling for gas, down from 120 in the spring.
The net impact of the drilling cutback is that domestic gas production is roughly 2 Bcf/d below earlier production levels. If gas production cutbacks continue, the large storage surplus will contract further. That should help boost gas prices heading into winter.
Gas storage shrinks from heat and driller actions, but price remains weak.
One wildcard in the gas supply picture is the weather. That is no surprise. The summer heat has been a big variable in gas demand. Gas supply has yet to be disrupted by a hurricane in the Gulf of Mexico.
Those agencies and organizations forecasting hurricanes have reiterated their high 2024 activity projections. Storm activity appears to be picking up. This is unsurprising as the most active hurricane phase is in late August and early September. One or more hurricanes could significantly disrupt GOM output.
Hurricanes can be cut both ways. They can disrupt gas output. However, storms risk coastal damage that could cut gas demand. Predicting such a scenario is impossible and would be irresponsible. However, anyone following and forecasting the gas market for the next few months must factor such scenarios into their thinking. It will be a tough natural gas market from now to November. Gas prices are likely to remain under pressure.
This story was originally featured in ON&T Magazine’s September 2024 issue. Click here to read more.
