Oil and Gas Price Update: Q1 2024 in Review

The upswing in prices in Q1 of this year can be attributed to several factors, according to Nuttall.

First, values were rebounding from a period of low activity, driven by unfounded concerns about weak oil demand and exaggerated fears about increased US shale production.

Second were the OPEC+ production cuts, which played a significant role in reducing oil inventories.

Nuttall explained that typically, demand is weakest at the beginning of the year; this year, however, inventories have only seen a minimal increase compared to the substantial buildup last year. This underscores the effectiveness of OPEC+'s cuts in counteracting the impact of strategic petroleum reserve releases and stabilizing oil prices.

“Lastly, we do have a geopolitical risk premium on the oil price now, I'm guessing US$5 a barrel,” he said.

“We haven't had a risk premium in quite a while. But what we're seeing in the Middle East, what we're seeing (with) Russia, Ukraine, it just fast forwarded where I thought we were going to be — I thought we'd be at US$90 in the summertime, (but) we’re there a few months earlier than I thought," Nuttall added.

US stalls on refilling Strategic Petroleum Reserve

In 2022, the Biden administration sold 180 million barrels of oil from the Strategic Petroleum Reserve (SPR), responding to global turmoil caused by the start of the Russia-Ukraine war.

Since then it has reversed its strategy and is looking to refill the SPR.

On February 26, the US Department of Energy said it wanted to purchase up to 3 million barrels of crude oil for the SPR, aiming to enhance the nation's energy security. However, less than a week later, the administration scrapped two purchases that would have fulfilled that plan, citing high prices.

While Ninepoint’s Nuttall doesn’t think SPR restocking will impact broader oil prices, he was surprised by the government’s decision to refill. “The biggest threat to (US President Joe Biden's) re-election is inflation. And the biggest input to inflation is energy pricing, specifically oil and gasoline,” the expert explained.

“So it was counterintuitive to me, and I think it was purely for political theater that he started to refill it.”

Experts bullish on oil prices long term

A report from FocusEconomics shows that analysts polled by the firm are forecasting a 10 percent decline in Brent and WTI prices over the next decade compared to 2023 levels.

However, prices are anticipated to remain historically high in the near term due to increased demand from China and India. The panelists see Brent crude averaging around US$85 for the remainder of the year.

Nuttall has a more bullish stance, supported by an increase in demand while global inventories are already at multi-year lows. Using the "days of supply" metric, which estimates how many days current inventory levels will last based on the current consumption rate, he expects inventories to reach the “lowest level in history later this year.”

“That's very supportive of a high price,” he said. He sees oil prices remaining in the US$90 range.

Nuttall noted that geopolitical events have accelerated the approach to this price target. In his view, the subsequent trajectory of prices will depend on when Saudi Arabia decides to return barrels and the pace of that return; he is also watching geopolitical developments in the Middle East and Russia.

While there are uncertainties, such as how potential infrastructure damage could impact oil flows, factors like stronger US demand, solid Indian demand and better-than-expected European performance contribute to his bullish outlook.

“But we're not calling for US$150 oil, we just don't think that's reasonable right now," he clarified.

“Higher LNG production (up by 3 percent y-o-y), together with stronger piped gas deliveries to Europe and China, further eased supply fundamentals and supported demand growth,” states the International Energy Agency.

The market overview from the organization also notes that global natural gas demand was up 2 percent for the quarter, but was more than offset by the production uptick.

Natural gas prices subdued after previous highs

Natural gas prices are expected to remain well below the highs set in 2022, when values neared US$10, propelled by market uncertainty brought on by Russia’s invasion of Ukraine and fears around supply security.

After a steep decline in late 2022, prices remained below US$5 throughout 2023.

Although concerns about Panama Canal and Red Sea disruptions led to speculation about a geopolitical premium, an uptick of this kind has yet to materialize in the natural gas market.

For the remainder of the year, FocusEconomics panelists expect natural gas prices to decrease in Asia and Europe compared to 2023 averages, while remaining steady in the US, staying below the pre-pandemic 10 year average.

Prices could see declines brought on by an abundance in natural gas inventories in all regions, attributed to mild weather conditions from the El Niño pattern and subdued industrial activity.

Europe will continue to be an important region to watch as ongoing sanctions on Russian gas, the continued conflict in Ukraine and supply security trends could add tailwinds to prices.

“The structural deficit in European natural gas has yet to be fully resolved with increased (liquefied natural gas) supply not yet fully making up for lost Russian imports. Thus, European gas prices remain vulnerable to supply interruptions or increases in demand,” analysts at Goldman Sachs (NYSE:GS) told FocusEconomics.

“This is especially the case during winter, when weather-dependent heating comprises the bulk of demand and bouts of cold weather can lead to rapidly falling stocks and higher prices," they added.

Increased US LNG export capacity could facilitate a price convergence among regions by the end of 2025.

“In 2025, US natural gas prices are expected to surpass the pre-pandemic average, with Europe seeing a slight increase and Asia maintaining stability,” FocusEconomics' natural gas market outlook reads. "The absence of El Niño is predicted to boost heating demand, while industrial output growth will drive up consumption.”