After a relatively mild winter characterised by largely balanced supply and demand, many of us appear to have forgotten the crippling oil prices of last summer. At a time of runaway inflation and with many still reeling from the pandemic, crude prices reached an eye-watering high of $116 a barrel. This sent prices shooting up at the pump and had knock-on effects for a range of related service sectors, such as freight forwarding, passenger transportation, and local delivery, to name but a few. Then, to make matters worse, the ongoing geopolitical tensions in Eastern Europe led to record increases in natural gas prices that saw the Natural Gas EU Dutch TTF increase from an already high average price per MWh of €93.16 in August 2021 to an all-time high of €339.42 exactly one year later.
Since the start of this year, however, prices of both these key energy resources have been in relative freefall, with WTI and Brent crude now (as of 29/08) sitting at $80.65 and $85.12 per barrel, respectively. Natural gas has come down even harder, with EU average prices currently at €36.40 per MWh and $2.55 per million BTU for US Henry Hub (down from $8.81 twelve months ago). With OPEC+ remaining steadfast in their production cuts as demand from post-zero-COVID China rises and with what's expected to be a much harsher winter fast approaching, many investors and traders are wondering whether these multi-year lows in the energy markets can be sustained much longer. In this piece, we'll take a broad look at the global oil and gas markets and their prospects into 2024.
As we've already stated, crude oil of virtually all varieties has been quite steady since the start of the year, with prices hovering around $80 for much of 2023. Now, however, we've started to see some more intentional movement as both Brent and WTI have managed to make gains of almost 12% over the past thirty days. It's no secret that both the Saudis and the Russians have been aiming to support prices in and around current levels, with Riyadh now making voluntary output cuts of 1 million barrels per day for a third consecutive month and Moscow committing to a 300,000 bpd reduction in September.
Furthermore, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) already agreed a broad deal in June to curtail total supplies until the end of 2024. This means that the oil market is likely to be highly sensitive to demand jumps over this entire period, and this is precisely what we've seen with the recent gains following increased demand from China following the end of its zero-COVID policy. Experts from Morgan Stanley "suspect that the likely inventory trajectory anchors the market around $80/bbl, probably in a $75-85/bbl range", and yet the investment bank has still increased its demand forecast from 1.8 million bpd to 2.1 million bpd and does expect the bulls to come to the fore in Q4 2023 and Q1 2024.
Cooking with gas
While oil is certainly a staple commodity, gas is a matter of life or death, especially when winter comes rolling around. And while we might have gotten away with a mild one last year, all the latest data suggest that this year will be bitter. As temperatures plummet and demand for natural gas soars, we simply cannot predict how high prices might go. After all, the geopolitical situation at present means Europe still lacks a stable supply of cheap and plentiful gas. Despite the potential to import from the US, the practicalities of such an undertaking might not only mean higher prices but also supply interruptions.
Though demand has been weaker of late, that's expected to change very soon. First, it was revealed that the new German LNG terminal will face substantial delays in becoming operational just as Norway announced that it is shutting down its Troll gas field for maintenance. And with the major EU reserves at below 90% capacity, this could soon become a problem if the heating season begins earlier than expected. What's more, the supply-side risks don't end in Europe but are, in fact, global. In Australia, Chevron is still in the grip of industrial action that has seen LNG workers down under strike for higher pay. Until an updated proposal is accepted by the unions, this will inevitably magnify any increases in global prices. Given the current cocktail of supply drought and impending demand hikes, Henry Hub Natural Gas prices could rise to above $3.00 in the coming weeks, especially if the current sentiment and the news environment are sustained.
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