Finance News

Election, Weather and Economic Uncertainties Drive Commodity Prices

Crude Oil:

Oil prices continue to fluctuate in the low $40s per barrel, but with sufficient daily movement to give traders a chance to make a few pennies on trades. For industry execs, the lack of sustained upward price movement has them focused on controlling and cutting costs. Success in this effort is demonstrated by the recent upticks in the drilling rig count and number of well completions. So far, the activity uptick has yet to stem the oil production decline, and the market knows much higher prices will only come once the inventory piled up during this spring’s COVID-19-driven demand collapse is eliminated.

Screenshot2020 2 3Although weekly crude oil production continues sliding, producers are restarting previously shut-in wells and drilling and completing new ones at today’s prices, signaling the worst for the industry is behind it. But where are prices going, and what does it mean for the industry?

Energy investment bank TPH recently surveyed energy CEOs and directors seeking their views on the industry’s outlook. The survey reported that 82% of respondents expect a $50 oil price to prevail at the end of 2021, with 9% calling equally for higher and lower prices. Amazingly, two-thirds of respondents anticipate the oil price will still be $50 at the end of 2023! One-third expects $70, but no one expects a $30 price, which is a vote of confidence for a better industry future. However, the history of oil price forecasts is not good, since they often reflect extensions of current trends. In other words, no one sees black swans, white swans, or any swans.

A more telling survey response was that 99% expects increasing rates of industry consolidation. That is important, as we just witnessed three merger announcements within 22 days! This will produce a more efficient industry that can profit at current oil prices—even if they don’t improve, as the survey expects. Consolidation is not good news for employees, as companies will need fewer of them. Significant industry consolidation is necessary for a recovery to occur—something akin to what we experienced in the late 1990s that set the industry up for its glorious run of the early 2000s.

Screensot2020 2 4Contrary to some views, the end of the Age of Oil is not imminent. While the ending may be starting, there is no alternative fuel system that can facilitate such a transition for several decades. It will happen first in mature economies where demographics and politics facilitate the transition. The developing and populous economies of Asia, Africa and Latin America need efficient and potent fuels, meaning gasoline and diesel power. Expensive battery-powered cars with limited range and needing a charging infrastructure will restrain growth in these regions. The upcoming U.S. election will be an opportunity to gauge the future transition for fossil fuels in the U.S., but energy’s physical realities is what will truly dictate the pace of the energy transition.

Natural Gas:

Henry Hub gas prices are in rarified air north of $3 per thousand cubic feet. For the past few months, gas prices have bounced up and down on weather and LNG export demand trends. Bouts of cold air sent gas prices up, only to have them fall back when hurricanes cut off LNG exports. The end to hurricane season is in view, and LNG export volumes are climbing as terminals impacted by storm damage come back on-line. Winter remains the key driver for gas prices, as we are on track for possibly an all-time record storage volume.

An early boost to gas prices this fall was helped by collapsing oil prices this spring that saw producers shut in wells with a loss of associated gas supply. That helped tighten the gas market until oil prices rebounded, capped wells were uncapped, and gas supply stopped shrinking.

Screen Shot 2020 10 30 at 12.21.01 PMWe are nearing 4 trillion cubic feet of gas in storage, which should be depressing gas prices, but the rebound in global LNG prices has increased margins for U.S. exporters who are stepping up shipments. When added to anticipated winter demand, the LNG increase is boosting gas prices. Moreover, gas production is struggling, despite higher prices because gas drilling continues to lag. The EIA’s short-term projections call for gas production to steadily fall until next May, and as a result, it sees gas prices climbing close to $3.50. They believe higher prices will be necessary to stimulate a supply recovery. The predicted gas prices take us to the highest levels since 2016, other than experienced during the two polar vortexes. Importantly, the EIA doesn’t see gas prices falling below $3.10 throughout all of 2021. For an industry that had to learn to live with $2-$3 gas prices following an era of $8-$10, an extended period of prices north of $3 will be an enjoyable experience. The question is: Will international gas prices remain elevated to allow U.S. LNG exports to be profitable in the global gas market?

If LNG exports remain stable throughout the winter, gas price movements will be most influenced by weather patterns. NOAA’s winter forecast is influenced by the continuation of La Nina, which means cooler, wetter conditions across the North, while warmer, drier conditions will dominate the South. The Old Farmer’s Almanac has a similar outlook, with a few areas being significantly colder and snowier than last year. Overall, this should not be a severe winter, which is confirmed by our watching the neighborhood squirrels who aren’t hoarding nuts. Gas prices will likely weaken by early spring with only modest winter gas demand, and higher oil prices boosting associated gas supply and more gas drilling. Producers hoping for higher prices should pray for a polar vortex or two this winter.

By G. Allen Brooks | Author, Musings From the Oil Patch

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