Prices for both crude oil and natural gas will push higher by year’s end. $100/bbl Brent and $4.00 Henry Hub are within reason. A hotter summer and significant production shut-ins drive the bullish thesis on natural gas. Meanwhile, OPEC (namely Saudi) discipline, strong demand and weaker supply growth y/y drive the oil thesis, according to Al Salazar, head of macro-oil and gas research at Enervus Intelligence Research.
OPEC+ is meeting June 2 and is expected to continue to roll existing production cuts forward. The meeting is not expected to yield any surprises, say industry experts.
Front-month natural gas prices could touch $4/MMBtu by the end of 2024, despite current levels being stuck in the $2.50-$3.00 range.
“The January contract is roughly 20 cents away,” said Salazar.
That said, the bullish natural gas call is subject to one major condition – weather.
Natural gas stakeholders roll their eyes when the obvious is stated, weather matters in natural gas markets. But weather matters more so now than ever given the historic gas glut. Winters have been trending much warmer due over the past five consecutive years, while summers have steadily been hotter.
“Odds are the trend of hotter summers will continue, according to the National Oceanic and Atmospheric Administration,” Salazar said. “And if El-Nino is over, maybe we can get a cold winter. Now there’s something for gas producers to be excited about!”
As for oil prices, its often cited that the direction of oil prices is guided by current geopolitical news such as the death of Iranian President Ebrahim Raisi or the Israeli War in Gaza. However, that may not be entirely true.
“Our correlations between crude and product stocks and oil prices tell us Brent is fairly priced,” Salazar said. “We are where we should be, as recent history shows comparable price and stock levels, to what we see today.”
Current news can impact Brent and WTI prices, resulting in intraday movements, or changes in option prices. However, if geopolitical events do not cause a material supply or demand disruption and impact inventories – the price move will not hold.
“News stories that try and tie geopolitical events to oil price movements over the past few months have had a tough time, as the price of oil has largely been flat.”
Prices have traded within a tight range of $82/bbl to $84/bbl for Brent.
“Again, our correlation and a day-to-day check of events vs price tells us there’s no material price premium in Brent. Outlets are stretching to try to explain day-to-day price movements,” Salazar said.
“However, you probably can see it if you’re buying/selling options – calls or puts.” The cost of such financial instruments might be more expensive because of a war” he said.
EIR Remains Bullish on Oil:
“When comparing year-on-year supply and demand fundamentals, this year seems more bullish than last. We were expecting $100/bbl Brent last year. It hit just under $98 before supply from the U.S, Iran and Brazil outperformed our expectations,” said Salazar. This year such supply surprises seem far fetched with the U.S. rig count down, Brazil’s guidance showing no repeat of last year and Iran being largely tapped out. This leaves OPEC as the only likely player that can lead to a material upside surprise in supply.
“There doesn’t seem to be any notion that OPEC is going to increase production,” Salazar said.
Demand remains robust and seasonally it’s about to accelerate with summer driving season. Inventory draws will come and so too will higher oil prices.
