The first half of 2024 has been riddled with geopolitical tension that’s made for a wild ride with crude oil prices. With West Texas Intermediate (WTI) prices ranging from $70 per barrel in January to as high as near $87 per barrel in mid-April, many are left wondering if this ride will continue through the remainder of the year. As is often the case, the answer is: it depends. However, most signs point to calmer waters ahead.
So far this year, where oil is concerned, many of the risks have been more bark than bite. The Houthi attacks in the Red Sea shipping areas and Ukraine targeting and actually hitting Russian interior refineries received a lot of press—and, of course, have drastic implications for those involved, as well as for the level of geopolitical tension. However, the actual number of barrels taken off the global market due to these events has been minimal. The real trade was to “sell the rumor and buy the fact.” What’s on the horizon? While major supply disruptions caused by these conflicts remain a possibility, the energy market’s nervousness is easing.
Production Cuts Remain Likely
There are still plenty of wild cards. One factor that has been taking barrels off the global stage is OPEC+, whose members, in March, agreed to extend their voluntary output cuts of 2.2 million barrels per day until the end of June. In early April, OPEC+ released a statement supporting member countries’ efforts to more fully conform with the cuts. Namely, Iraq and Kazakhstan pledged to achieve full conformity and compensate for overproduction, and Russia announced that its voluntary adjustments in the Q2 2024 will be based on production instead of exports.
OPEC’s compliance with production cuts will most likely last through the remainder of the year. That does remove one wild card—unless OPEC+ ministers change their oil supply policy for the second half of the year or if the voluntary production cuts continue and there is less compliance.
Questions Remain About Global Economic Growth
The strength of the global economy, which impacts oil demand, is another wild card. Slower economic growth in Asia is a potential headwind for oil prices because of the volume of manufacturing in the region. That’s particularly true for China, known as “the world’s factory.” The Eurasia Group has estimated that China’s oil demand growth this year will drop substantially from what it was in 2019. Moreover, they anticipate that China will forego its model of oil-intensive economic growth, so we likely won’t see its demand return to the levels seen previously. The International Monetary Fund (IMF), meanwhile, expects that China’s economic growth will fall from 5.2 percent in 2023 to 4.6 percent in this year, with another drop to 4.1 percent in 2025. However, the IMF projects that the broader world economy will continue growing at 3.2 percent this year and in 2025, which is the same pace as global growth in 2023.
What does this all mean for oil prices? Unless we see a weakening of the global economy or OPEC+ overproducing past their production quotas, crude prices should be in equilibrium at around the mid-$70-per-barrel area (Nymex WTI). However, the U.S. Dollar Index is also a wild card for crude exports. The stronger the U.S. dollar remains, the more exports could struggle, which could add more to storage.
Natural Gas Renaissance?
Natural gas seems to have found a floor in the $1.70-to-$1.80 range, as prices that cheap are not normally sustainable, even with storage pushing more than 30 percent above the five-year average.
However, as the popularity of electric vehicles (EVs) grows, the ongoing and future demands for AI are determined along with the fact that as more states are banning new pipeline construction, the bigger the electric grids need to grow and become more reliable. While wind and solar will assist in these electricity needs, these green energy sources probably will not be able to keep up with the pull the electric grid is going to demand. The demand for energy from the major sources inclusive of natural gas have reached peak historical levels over the last several years. It’s important to note that new energy sources complement, as opposed to supplement, traditional sources, meaning all forms of energy will be needed to work together to meet future demand. As a result, it is very likely more natural gas will be needed and, if it can’t be supplied by pipeline, then it will have to come by power line, mostly through NG powered electric generation.
Over the last decade, hydrocarbons and specifically natural gas contributed the most additional energy. It has only taken more time, money, and “energy” to provide infrastructure and unprecedented agreements in political circles to create upside capacity. Modern alternatives have not muted the large part of electrical demand and are likely years away from doing so, which only creates more need for natural gas power generation. It also creates some concern about the longer term reliability of the electrical grid.
Either way, it’s likely that natural gas will be the most prominent producing power source. And that begs the question: Have we seen prices bottom, but is the upside capped? We think so, until at least fall. Even then, only if temperatures for this summer average above normal. We have seen an early season positive NG move as temperatures have been higher than normal in the early part of summer. It would take some abnormal deviation of temperatures for us to see a major move up in prices before year-end. Global geopolitical events and security could also have an impact on the supply/demand outlook for LNG, which would impact domestic supply and infrastructure. The United States is a major player in the global LNG market and experts predict this will only increase. As a result, one would expect that LNG buildout would erode supply, effectively creating some additional demand to NG. However, if NG supply is needed to meet an increasing global LNG supply and domestic electrical demand while suppliers of the natural gas are effectively in maintenance mode as recent rig counts (gas drilling activity down almost 40 percent year over year). This would suggest after pricing dropped below recent break even levels then the demand for natural gas is out there in a big way and the longer term odds favor the upside as time passes. Longer term, it is unlikely that the current natural gas markets are not pricing in the demand from the newer data centers being constructed, which could be as much as 5-10x the older data centers. Furthermore, the data center and AI demand growth phase could offset any LNG oversupply condition.
Dennis Kissler
Dennis Kissler is a senior vice president of trading for BOK Financial, where he has worked for 15 years, specializing in analytical research and trading crude oil and natural gas futures and derivatives. Earlier in his career he spent 12 years on the Chicago Mercantile Exchange trading floor as an independent floor trader, owned a major commodities brokerage firm with offices in six states and worked college summers on an oil and gas drilling rig in western Oklahoma—all to hone his knowledge of the oil and gas trading industry.
Jeff Hall
Jeff Hall is a senior vice president/manager of energy banking for BOK Financial where he has worked for 23 years exclusively in the energy financial services area and is registered representative.