Oil and gas prices have declined as investor concerns about the impact of the Russia-Ukraine war have faded due to the European Union’s considerable success in eliminating Russian oil and gas imports, according to analyst firm Morningstar. Even after the recent selloff, crude prices are still elevated compared with Morningstar’s midcycle forecasts. This explains why only one-third of stocks under Morningstar’s coverage currently look cheap, according to Morningstar’s Oil & Gas Q2 2023 report. United States natural gas has dipped below their midcycle forecast ($3.30/mcf) but that hasn’t spooked the market like it otherwise might have, as there is a clear line of sight to incremental export capacity that will drive up demand in 2024.
Key takeaways from the report:
- Oil Prices Have Fallen Despite OPEC+ Cuts: Global oil prices declined 10 percent (WTI) and 10 percent (Brent) since the prior quarter. OPEC+ production cuts are expected to tighten the market, driving supply deficits in the second half of 2023, supporting higher oil prices, in Morningstar’s view. After a lengthy period of producing well above OPEC quotas, it looks like Russian production is now within compliance. With U.S. producers unwilling to respond, OPEC+, led by Saudi Arabia’s 1 mmbpd July cut, are emboldened to protect prices without fear of market reprisals.
- Gas Prices Have Yet to Improve in Tough Year: U.S. (Henry Hub), Asia (JKM), and Europe (TTM) natural gas prices decreased by 21 percent, 34 percent, and 31 percent respectively since the prior quarter. Market optimism regarding the E.U. gas consumption picture remains high, especially with a slower-than-expected recovery in gas consumption and LNG demand from China. The restart of the U.S. LNG export terminal Freeport will help somewhat, but we’ll need unusually warm or cold weather in the E.U. this year and the addition of new U.S. LNG capacity in 2024 to really tighten the market and provide a level of price support.
- Energy Stocks Underperformed the Markets: Energy stocks continued to underperform, which isn’t surprising in a weak environment for oil and gas prices. However, just 36 percent of Morningstar’s energy coverage is undervalued. On the oil side, this suggests that investors are largely underwriting much higher midcycle prices than our own forecasts ($55 WTI/$60 Brent per bbl). For gas, this suggests that investors are anticipating a sharp recovery in prices over the next few years toward our midcycle forecast ($3.30/mcf Henry Hub), and largely agree with our view that poor 2023 conditions are temporary.