Will oil and gas remain biased to the upside?
You can’t tell the story of oil and gas in 2023 without talking of a fall.
Not a fall from grace per se, but from the dizzying heights of $122-per-barrel for Brent Crude and $9.2m British thermal units (MMBtu) to highs of $93.89-per-barrel and $3.8MMBtu.
Thanks to repetitive geopolitical shocks such as G7 sanctions on Russian oil sales and the Israel-Palestine war, oil has seen a more turbulent year, breaking the $80-per-barrel mark five times since January.
Global natural gas prices also rose steadily from January to August 2023’s highpoint of $3.8MMBtu before dropping off consistently month-on-month to late December.
As the battle to control oil prices rages on between OPEC+ and the US and the winter conditions re-assert their yearly hold on gas prices, will either remain biased to the upside?
Oil
Oil prices are extraordinarily volatile because it is such an essential part of the world’s energy mix. Furthermore oil production requires years of upfront capital expenditure and planning to begin the flow but once it is up and running, the operating costs are relatively low.
October and November 2023 have historically been the weakest months of the year for crude oil over the past 44 years, with December providing only modest improvements.
Bullish bets on crude hitting $100 per barrel before the end of 2023 look unlikely to hit as OPEC+ production cuts are somewhat offset by record inventories in North America.
This leaves precious little solid evidence to make a bull or bear call on the oil market for 2024; particularly as the wars in Ukraine and Palestine rage on.
Though $3–4/bl risk premiums were initially baked into trading immediately after Hamas’ October 7th attacks, there has seemed to be little effect on physical supply.
Indeed the biggest mover of pricing for the year was OPEC+’s initial cut announcement in September, when crude spiked to around $98/bl.
Despite the promise of further cuts into Q1 2024 yielding little in the way of price rises thus far, Goldman Sachs is betting on OPEC+ retaining its ability to inflict a price reset to the upside.
Accordingly, it has raised its forecast for Brent crude oil prices by the end of 2023 from $90 to $95, and by the end of 2024 from $97 to $100.
Barclays, too, has hiked its 2024 outlook by $8-per-barrel to around $97, as it expects a continuation of strong US production.
The US’ Energy Information Agency (EIA) is also taking the OPEC+ cuts and their extension into next year into its forecast.
In an October report, the body projected that OPEC+ crude oil production will decrease by an additional 300,000 b/d on average in 2024 and a corresponding annual average Brent spot price rise of $7/bbl to $95/bbl.
Analysts from J.P. Morgan are far more tempered in their outlook, however, forecasting Brent prices to remain largely flat in 2024, averaging $83/bbl as demand rises, Europe stabilises and the US remains in a strong growth spot.
Forecasting oil prices can be a nearly impossible task on an hourly basis, let alone looking years ahead.
But the gradual move away from fossil fuels is more than likely going to suppress prices over the long-term.
Energy consultancy Wood Mackenzie recently predicted that if global fuel consumption falls in line with the emission targets set to limit global warming, oil price projections in 2030 could fall as low as $40/bbl.
The biggest factor for price-watchers is the speed and diligence with which the transition away from fossil fuels is conducted and how oil majors and how organisations like OPEC+ fall in line.
Gas
Eighteen months ago, Europe experienced something of a major energy squeeze due to the Russian invasion of Ukraine.
Natural gas prices on the continent are 70 per cent over their long-term average preceding the war and have soared during the last two months as a result of pre-winter nerves.
Looking ahead, ANZ Research forecasts the LNG spot price to drop to an average of $23.5/MMBtu in 2024, compared with an estimated $36.8/MMBtu in 2022.
The World Bank, meanwhile, predicts European gas prices to trade at $28 in 2024, dropping from $40 in 2022.
What’s more, due to its current reliance on imports, Europe is now subject to temporary price volatility especially as winter sets in.
From a UK perspective, gas grid operator National Gas Transmission (NGT) said in September that it was expecting an increase in residential gas demand in the period of October 2023 – March 2024, but a fall in gas demand from the power sector.
NGT warned, however, that demand would be impacted by a number of factors this winter, including still high wholesale gas prices.
Analysis by S&P Global Commodity Insights shows that gas demand this winter in the UK’s residential, commercial and small industrial sector is seen at 27.9 Bcm, up 7.7 per cent on last winter’s volume.
The company added that the conditions for this winter are “generally more favourable” than last year, but that it remained alert to the global risks that are present.
Europe meanwhile has rebuilt its gas infrastructure well since it cut imports from Russia at the outbreak of the war.
Infrastructure for importing natural gas via sea or pipeline from countries other than Russia has expanded rapidly and three months earlier than the November deadline, Europe’s gas storage levels reached 99.5 per cent.
But ultimately, for as long as the Russia-Ukraine war persists, Europe and the UK have fewer options to get hold of gas should they need to, especially if colder winters set in or Russia chooses to cut off all European gas exports.
What’s more, 2023 has seen several specific events spike prices and shift market confidence including strikes at plants in Australia and the sabotage of the Baltic connector pipeline.
As a result, London-based consultancy Timera Energy forecasts “asymmetric upside risk for prices,” heading into 2024.
Even if scenarios like over-supply or a warm winter could in theory bring a downside risk, supply to keep coal-dependent industries across European and the UK power sectors will likely hedge against it.