Update: crude oil and natural gas markets

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By Rick A. Veitch


Short-term hydrocarbon markets remain tight, due to Russia / Ukraine, but long-term oil prices are being pushed down by further emerging factors.

Global hydrocarbon markets continue to take their cue from the Russian / Ukrainian headlines conflict and related gas shortages in Europe, but additional factors are increasingly shaping short- and long-term expectations about crude oil and natural gas prices.

Recessive fears in the US and Europe, continued COVID disruptions impacting Chinese demand, and Russian barrels hitting the market have introduced bearish concerns in oil markets.

However, as rapid oil prices have fallen below $ 100 over the past two months, we continue to see future supply deficits in global markets, with further destruction of demand likely still needed.

Adjusting to the year-to-date appreciation of the US dollar, the prices of forward perfected products remain high in local markets and reflect the prices at which we expect demand disruption to occur.

Long-term oil prices have fallen significantly over the past month. Futures markets now reflect $ 55-60 WTI, which is in the context of pre-Russia / Ukraine conflict levels.

We attribute the downward movement in long-term expectations to the strengthening of the US dollar, which is expected to create far-reaching incremental headwinds to global demand, as well as the expected acceleration of the cost competitiveness of electric vehicles due to recent and future legislation.

Global natural gas markets remain rightly focused on gas shortages in Europe. Liquefied natural gas (LNG) remains the most expensive hydrocarbon based on energy content. US natural gas remains the lowest cost hydrocarbon, which has resulted in significant international price arbitrage.

While U.S. upstream gas producers are unable to grasp this difference today, it continues to drive at a record pace of LNG export contract signings, which is likely to support future U.S. natural gas demand. Long-term gas price expectations in the US have increased in recent months and are now in the range of $ 5 to $ 6 (compared to $ 3-4 before the conflict).

In the short term, high natural gas prices in the US remain driven by inventory levels. As measured by the days of demand coverage, inventories remain well below historical levels.

Demand destruction prices continue to be needed to improve inventory balances before the winter heating season and into 2023. Domestic natural gas producers have not been logistically able to respond to current rapid gas prices or are not been willing to allocate capital.

As for US energy issuers, we expect continued improvement and balance sheet stability from oil and gas prices in the short term, with capital structures better positioned for future commodity declines than in previous periods.


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