Dennis Kissler is senior vice president of trading for BOK Financial Securities. He is based in Oklahoma City.
The price drops that marked the first half of 2023 were hair-raising for even those battle-hardened by longtime experience in the tumultuous crude and natural gas markets. Now, as we reach the midpoint of the year, the pendulum for a price rebound can swing in either direction.
In January, WTI crude was $82/bbl and natural gas prices were near $5/MMBtu. By early May, WTI crude was down to $64/bbl. Natural gas prices, meanwhile, were down to $2/MMBtu in late April.
So, what happened?
First, let’s take the crude market. Economic uncertainty about inflation, interest rates and Asian COVID lockdowns have created exaggerated volatility in prices. Meanwhile, so far this year, the crude market has experienced a light surplus, halting crude’s upward price movement.
Demand has remained elevated, even with higher interest rates and China’s re-opening, which really began in early March. Jet fuel demand has remained especially strong since China re-opened.
However, altogether this higher demand hasn’t been enough to raise crude prices. One factor is that Russian crude has continued flowing into the world market (while at discounted prices), satisfying the needs of India and most of Asia.
Natural gas prices, meanwhile, experienced a perfect storm. In the U.S., we had one of the warmest January and February temperature patterns on record. Additionally, Russia continued to flow natural gas into Europe, which many analysts did not think would happen. Appalachian, Haynesville and Permian natural gas continued to have record production levels.
Although global LNG became a major demand pull, it wasn’t enough. The closing of the Freeport, Texas, facility in mid-winter was the final straw that subdued natural gas prices into the low $2 area, taking storage over 20% above the five-year average.
“If the U.S and Asian economies can hold together, crude oil economics could easily move back to a deficit structure by over 1 MMbbl/d before year-end.”
—Dennis Kissler, BOK Financial Securities
Demand may decide the second half of the year
If the U.S. and Asian economies can hold together, crude oil economics could easily move back to a deficit structure by over 1 MMbbl/d before year-end. This could place WTI prices back in the $90/bbl area. Add in regional banks consolidating lending practices and capital expenditure funding for new drilling staying stagnate, and the increase in prices can easily be predicted.
The wild card will, of course, be demand.
On the plus side, the driving season is upon us now and, as of this writing, travel demand looks to be hitting on all cylinders.
However, consumers may be unsure about the economy, especially if interest rates rise further in the U.S. and bank failures continue. That scenario could take crude prices back into the $50/bbl area.
Additionally, in the near term, the turning of cheap Russian oil into fuel (mostly from India) is one factor that could stress refinery profitability and cause a false sense of oversupplied fuel that would slow crude demand.
In sum, you can bet crude price volatility is here to stay, at least until the Russia/Ukraine war ceases.
Natural gas predictions are more pessimistic, especially if record U.S. production persists and Europe continues to receive Russian natural gas.
The only bright spot has been that power demand remains elevated. Natural gas prices being in the low $2/MMBtu area has spurred the switch from coal to natural gas.
Meanwhile, much of the newest production from the Appalachian and the Permian is landlocked and, while not raising prices, it may not pull down prices either. When natural gas is locked in certain areas, it may cause local basis areas to suffer, but not so much at the Henry Hub/Nymex price level.
LNG will continue to grow, and European storage will need to be monitored closely. If needed, LNG can certainly have a dramatic draw on storage, especially during adverse weather. LNG will be the wild card for natural gas prices for the next several years.
And so, to answer the question of whether crude and gas prices will rebound this year, I’ll say this: it depends. As geopolitical uncertainty continues—particularly in regard to the Russia/Ukraine war—and economic uncertainty persists in the U.S. and abroad, price volatility in the crude and natural gas markets will be here to stay.