Our other chart shows the track of daily crude oil prices for January and the early days of February. The track has been a roller coaster, marked by waves of optimism and pessimism about the future course of the economy and oil demand. The sudden reversal of China’s COVID-shutdown policy spurred optimism that a chunk of missing global oil demand would return and global supplies would be tested. This development came after the market realized that Russia and its customers had successfully navigated the introduction of western sanctions against purchasing Russian oil output keeping global supplies high. We are about to see whether the same success can be achieved as sanctions against purchasing Russian refined oil products, especially diesel, go into effect in early February.
The sharp drop in oil prices during the first three days of February would suggest that oil traders are betting there will be little supply impact from these new sanctions. Additionally, the surprisingly strong labor force data announced on February 3 signaled that the Federal Reserve will likely continue raising interest rates with the odds for a US recession growing with oil demand implications.
Oil market signals have been disrupted by two events—the large release of oil from the Strategic Petroleum Reserve and the unseasonably warm winter in Europe. While the oil release was politically motivated—to drive down gasoline pump prices prior to the November elections—it artificially expanded supplies. Attempts to purchase oil to replace the supply drawdown have proven unsuccessful because the market price remains above the government’s price target.
The warm winter months in Europe and the US have reduced demand for all forms of energy putting further pressure on the seasonally weak oil demand period. Weather changes, but the true health of the global oil market will not be known until this spring when seasonal economic activity increases and China’s reopening is further along. Saudi Arabian oil officials continue to warn of their limited capacity additions should demand rise suddenly.
The global economic uncertainty for the balance of 2023 dominates commodity market thinking currently, but those concerns could evaporate with a geopolitical event. Furthermore, we have yet to see what if any impact the new Russian sanctions going into effect will have on refined product markets and consumer prices. Buckle up for a bumpy ride in the early months of 2023, but keep your eyes focused on the long term for seriously challenged global oil markets.
NATURAL GAS
Last fall, the growth in domestic natural gas production arrived as the Freeport LNG terminal was out of commission following a fire. The terminal was programmed to be back in operation during September/October but the need for regulatory approval and testing of the plant’s equipment has delayed its return to service until early this year. The result is that less feed gas has been needed by LNG export facilities, leaving more supply to boost domestic storage.
Even the bitterly cold weather at Christmastime has not derailed the rapid recovery of gas storage. As of the end of January, gas storage volumes are matching the 5-year average, which is good news for future supply challenges. Not surprisingly, a more adequate supply has eroded natural gas prices, as shown in our accompanying chart.
After nearly touching $10 per thousand cubic feet last August, gas prices are now barely above $3, a price level that has prevailed for the past seven years (orange line). The warm winter in Europe has reduced the demand for US LNG supplies, although there was truly little room for the industry to ship additional gas. Now, the lower global gas price has spurred a return of Asian buyers to the market.
With the return to service of Freeport LNG, feed gas volumes for export will increase by 11 percent. That should help stem the slide in gas prices. Possibly we may see the early start-up of new LNG export capacity by the end of 2023. Projections show that when the three new terminals under construction reach full capacity in 2026, US gas export capacity will have grown by 40 percent, establishing the country as the world’s largest exporter.
Having seen what happens to gas markets when demand soars, as happened when Europe rushed to replace Russian pipeline gas supplies last year, prices are now reflecting underlying US supply/demand fundamentals. Government and climate activists’ attacks on natural gas continue with policies eroding potential demand growth (banning gas hookups in new buildings, mandating heat pumps, and banning gas stoves). However, natural gas is the preferred backup fuel for intermittent renewable energy, which continues to grow. The blackouts this winter have highlighted how people now value energy security over clean energy. That is good news for natural gas—the goto- fuel for winter storms.
This story was originally featured in ON&T Magazine’s Jan/Feb 2023 issue. Click here to read more.
