Volatility was the name of the game in 2023. Given the conflicts in Europe and the Middle East and ongoing concerns about sluggish economic growth in China and elsewhere—it’s no wonder energy prices remained volatile through most of the year. This volatility and uncertainty also served to drive deal making to a 10-year low. With a tumultuous year nearly behind us, it’s time to look ahead to 2024. We expect that commodity prices will depend much on weather and economic concerns, while geopolitical factors should continue to drive some of the more dramatic swings.
Natural gas prices will depend on the weather both in the United States and in Europe. Unlike crude, natural gas storage remains well above the five-year average. In fact, it is over 5.5 percent above in the United States, as of this writing, while natural gas storage in Europe is nearly 97 percent full. Keep in mind the facility at Freeport, Texas, is back at full capacity, and the El Paso pipeline is flowing, after both were offline in the coldest month of last winter. Therefore, with both back online, we could see supply surpluses deplete very quickly this winter. Natural gas exports to Mexico have also been hitting new records, which could also deplete supplies more quickly. Altogether, as we venture into 2024, we look for natural gas prices to be $3.10 on the low side, with a possible $4.50 to $5.00 handle in late January/early February, if we see temperatures to the low end of average.
However, the market is really looking to future LNG exports to support an overall higher price for natural gas in the long-term, and when that happens, we’ll see more sellers in the market with gas weighted properties that for now represent a limited segment of the A&D market.
Crude prices will depend significantly on the war in Gaza. The market first had placed a $5-to-$7-per barrel “war premium” in place; however, no real barrels were actually taken off the world markets. Just the same, in late November, when OPEC announced production cuts of an additional million barrels per day, oil closed down by 2.4 percent that day largely due to trader skepticism of whether some OPEC+ members will adhere to their respective production quotas.
That’s not to say that the danger of the war impacting energy supplies is gone, either. With Iranian threats, tensions are elevated. Iran is both a major oil supplier and the chief sponsor of Hamas. So, if Iran aids Hamas and the United States retaliates by tightening sanctions on Iran, the oil market will be undersupplied, which most likely would raise prices.
Weakening economies in both Europe and Asia could eventually pull demand lower, and prices that are too low can be just as damaging—or even more so—than prices that are too high. While $100 per barrel is too high and damages a global economy, $50 per barrel is too low in an inflated economy and damages oil’s infrastructure. Lower prices from here also would not stabilize the falling drilling rig rate numbers. Fortunately, unless we see a drastic escalation in the war in Gaza or a severe weakening of the U.S. economy, we do not think prices are in danger of going too far in either direction. Instead, we think prices are going to be range bound between $75.00-$87.00 per barrel, as we move into the new year.
Big Picture
This higher range for the price of oil, in addition to the end of rising interest rates, should help to spur an increase in acquisitions and divestitures, which has been on decline since in recent years. Albeit a number of factors have contributed to the sluggish A&D market, pent up demand for assets has led to higher participation rates, and in turn, more competitive bidding processes in advisor led divestments throughout 2023, and we expect this trend to continue into the new year. At some point, assets sell—nobody owns them forever.
This is all to say that, when it comes to the oil and gas business, the right answer is often “it depends.” In the best of times, the energy market still tends to be volatile in the best of times. However, given the global unrest that currently centers on the energy sector (both in Ukraine and the Middle East), volatility is more certain than ever as we move into 2024.
Dennis Kissler
Jason Reimbold
Dennis Kissler, SVP of Trading for BOK Financial, spent 12 years on the CME 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. Kissler has worked BOKF for over 15 years and specializes in analytical research and trading crude oil and natural gas futures and derivatives.
Jason Reimbold is the managing director of energy investment banking for BOK Financial Securities, member FINRA/SIPC and a subsidiary of BOK Financial Corporation. He has worked in energy finance since 2005 and currently offices in Dallas. At BOKF, Reimbold is responsible for leading the energy investment banking group while originating and executing client mandates including acquisitions, divestments, raising capital, and facilitating joint ventures.