By Rick A. Veitch
Short-term hydrocarbon markets remain tight due to Russia/Ukraine, but long-term oil prices are moving lower on additional emerging factors.
Global hydrocarbon markets continue to follow the lead of the Russian/Ukrainian headlines. conflict and related gas shortages in Europe, but additional factors are increasingly shaping short- and long-term crude oil and natural gas price expectations.
Recession fears in the US and Europe, ongoing COVID disruptions affecting Chinese demand, and Russian barrels hitting the market have all introduced bearish concerns to oil markets.
However, while fast oil prices have dipped below $100 in recent months, we continue to see future supply shortfalls in global markets, and additional demand destruction is likely still needed.
Adjusting for the appreciation of the US dollar so far this year, refined forward prices remain high in local markets and reflect prices at which we would expect demand destruction to occur.
Long-term oil prices have seen a significant drop over the last month. Forward markets are now reflecting $55-60 WTI, which is in the context of pre-Russian-Ukrainian conflict levels.
We attribute the downward move in long-term expectations to the strengthening of the US dollar, which should create incremental broad-based headwinds for global demand, as well as the expected acceleration in electric vehicle cost competitiveness due to the recent and future legislation.
Global natural gas markets remain rightly focused on gas shortages in Europe. Waterborne liquefied natural gas (LNG) remains the most expensive hydrocarbon in terms of energy content. US natural gas remains the lowest cost hydrocarbon, which has generated significant international price arbitrage.
While US upstream gas producers are unable to capture this gap today, it continues to drive a record pace of LNG export contract signings, which is likely to support future US natural gas demand. Expectations Long-term US gas prices have risen in recent months and are now in the $5-6 range (compared to $3-4 before the conflict).
In the short term, elevated domestic natural gas prices in the US will continue to be driven by inventory levels. Measured by days of demand coverage, inventories remain well below historical levels.
Demand destruction pricing remains necessary to improve inventory balances ahead of the winter heating season and into 2023. Domestic natural gas producers have been logistically unable to respond to current gas prices or not they wanted to allocate capital.
With respect to US energy issuers, we expect continued balance sheet improvement and near-term oil and gas price stability, with capital structures better positioned for future commodity downturns than in the past. previous periods.
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