The first quarter of 2023 can be described as a time of consequences. In particular, WTI and Brent prices evolved along trends driven that were generally in existence since 2022. Specifically, the European war, rapidly escalating interest rates, and a long predicted, but still not materialized recession. Gas prices are always dependent on weather, and gas buyers got significant relief due to a warm winter.
The Central Banks attempted to engineer an economic “soft landing” by raising interest rates, but this put several American banks into financial jeopardy. The impact on commodity prices for this financial crisis was short lived.
As always, weather was a key driver for natural gas prices.
As discussed previously, independent evaluator’s pricing forecasts have become more stable recently. This is true, despite the fact that the annual standard deviation on oil and gas prices is typically in the order of 30 percent. For example, with normal volatility, we could see price movements in WTI from the mid $50’s to the mid $90’s in 2023. As always, the triggers for this volatility cannot be reliably foreseen.
The Henry Hub gas price softened considerably in Q1 2023, as warm weather in key demand areas left storage near 5-year highs. Although GLJ has not changed its long-term forecast for natural gas, our near-term forecast reflects the time it will take to equilibrate storage volumes to mean trends.
The European gas crisis expected this winter resulting from a Russian supply cut has been managed and mitigated with the market accessing supply from other suppliers and a warm winter. This respite is welcome to European consumers, especially industrial ones. The ability of Europe to create new LNG import facilities, restrict demand, and to be frank, restart coal powered power production has been impressive. European gas has fallen from $30/MMBtu in late December to less than $15/MMBtu in late March 2023.
Oil was relatively stable in the last quarter and was traded generally between 70 and 80 dollars per bbl. Only during the worst days of a banking crisis in the USA, did prices fall below 70 dollars per bbl. But they quickly recovered. The biggest change in GLJ’s forecast is a rethink of WCS differentials. When facts change, we must change our opinion, and our expectation of longer and larger differentials was simply not born out. We have updated the WCS differential forecast to reflect the market reality.
Inflation and Exchange Rates
Inflation trends in Q1 suggest that major OECD countries’ inflation rates continue to be high, but slowly falling. GLJ has not changed its inflation outlook for 2024 onward.
As discussed last quarter, GLJ will be utilizing a fairly traditional inflation forecast of 2 percent per year to reflect the expected increase in CapEx and OpEx expenses going forward from January 1, 2023. We believe that the large increases observed in the field was a leading indicator and the impact of those increases has now been worked into the market. So, while we do expect a much higher Consumer Price Index (CPI) inflation, we do not forecast this on CapEx and OpEx.
Exchange rates continue to reflect a strong USD. The Canadian dollar has shown weakness that probably reflects other factors than our historical petro-currrency status. GLJ has reduced its long term CAD & USD forecast by 0.01. That is to say, we have forecasted the Canadian dollar to stabilize at a value US 0.01 lower than previously. Enormous deficits in Ottawa, and probable pause in Bank of Canada interest rates are likely factors.
April 2023 Price Forecast
GLJ has released our latest evaluator commodity price forecast effective April 1, 2023, reflecting the current sentiment seen throughout energy markets. Our oil forecast has WTI set at $72.50 USD/bbl for the remainder of 2023 and a long term price of $72.50 USD/bbl (in 2023 dollars), with the Edmonton Light crude price at CAD $94.77 for 2023. Our gas forecast has been adjusted to reflect current market trends in the short-term, while stabilizing in the longer-term at $4.10 USD/MMBtu and $4.23 CAD/MMBtu (2023 dollars) for Henry Hub and AECO, respectively.
Note to readers: This price deck was prepared using data available to March 31, 2023. Information such as OPEC announced production cut has not been included.