Kissler: Higher Temps, Lower Energy Prices

The Farmers’ Almanac—or a team of meteorologists—may have a good picture of where energy prices are headed in the near term, even with OPEC+’s recent round of production cuts and the ongoing geopolitical unrest.

Natural gas prices in particular have been hit hard by the mild temperatures both the U.S. and Europe experienced during fourth-quarter 2023. As a result, heating degree demand has been very sparse, and the U.S. even had natural gas storage builds going into December.

Most traders will watch the week of Jan. 10 as a measure of natural gas storage-to-price relationships—but the fact that both regions are looking at mild winter forecasts isn’t very positive for prices. Unless we see a gas storage draw down to under a 5% premium to the five-year average or lower, a major move in winter prices is unlikely.

LNG will be the big demand pull, and with the current global expansion that is underway in the LNG space, the back month futures should continue to hold a nice premium to front month prices, which is justified. While near-term prices will most likely stay subdued, any abnormal demand catalyst of late cold winter or extreme heat in the summer months could easily ignite a buying frenzy, as Russian supplies cannot be relied upon.

Energy vulnerability

However, even with the forecast for milder temperatures this winter, it’s still risky for regions that are trying to wean themselves off natural gas and other fossil fuels. If there’s a major weather event—and how often is there a winter in New England without a huge snowstorm?—these regions may face brownouts right when residents need heating the most.

As technology evolves, we will see somewhat of a transition to green energy, but this transition is going to take much longer than most people think. Countries or regions that try to force this transition likely will face costly energy vulnerability in the meantime. And this vulnerability could be potentially dangerous in cases of extreme hot or extreme cold if people don’t have cooling or heating because of power outages.

Even with cuts, lower oil demand may impact prices

Seasonal global demand for gasoline and diesel also has been slowing and will continue to do so until demand for heating oil in mid-January takes up some of the slack. Meanwhile, economic numbers in Asia and Europe weakened through the fourth quarter, with the U.S. also beginning to show lower numbers.

China’s struggles to jumpstart its economy after the pandemic have hit energy demand particularly hard. Due to its manufacturing-focused economy, China has been a major consumer of oil and commodities. Of course, as China’s economy has slowed, its energy consumption has slowed with it, so China’s ability to increase economic growth has major implications for the energy industry. Meanwhile, economic activity in other regions, such as Europe, has declined as central banks raised rates to fight inflation. The simple math is that global oil demand is lower now, and prices are finding an equilibrium with a $70 handle.

Although the OPEC+ group agreed to another “voluntary” production cut of 900,000 bbl/d, it has had a minimal positive effect on prices. The major reason for the small impact is the word “voluntary,” as OPEC+ members (especially from Africa) have opposed additional production cuts. Consequently, many traders believe most of the new quotas will be overrun with additional production. If you add in the fact that U.S. oil production also hit a new record in fourth-quarter 2023 of nearly 13.24 MMbbl/d, it really more than offsets OPEC’s efforts.

However, all this isn’t to say that energy prices moving higher is off the table. Both the Russia/Ukraine and Israel/Hamas wars remain intact and the unrest in the Middle East will continue. Any further escalation could turn prices higher very quickly. The U.S. is also forecasted to lower interest rates mid-year, which also could be a lingering positive for crude.

And so, although the forecast is for lower energy demand (and prices) at the moment, the tide can change very quickly