Economic signals continue to be a mixed set causing no consensus on the prospects for a recession or growth in 2023 or 2024. Last quarter, we speculated as to the factors that trigger new volatility in oil and gas prices are, by definition, unpredictable and no specific triggering event occurred. Consequently, in the last quarter, oil and gas prices have been more stable than is usually seen.
Notably, the IEA raised its estimate for 2023 oil demand to reach 102 million BPD in 2023. This is 1.3 million BPD higher than the 2019 estimate. This suggests that growth in world demand for oil is still occurring despite regulatory, geopolitical and economic headwinds. To steal a phrase from equity investing, global oil demand continues to “climb the wall of worry.”
GLJ has made no changes to our long term expected oil prices but has adjusted our short-term price expectations to reflect the market’s actual results and reduced our long-term price for Henry Hub natural gas to USD $4.00/mmbtu.
Natural Gas Prices
North American natural gas prices remained in a low range with no specific reason for optimism until a colder winter can burn off excess storage in the Americas and Europe. We note that late in Q2, Henry Hub prices approached USD $2.75/mmbtu, the highest in the quarter. First gas flows for LNG Canada, which are expected in 2025, cannot come sooner for Canadian producers who have significant AECO or Station 2 based contracts. European and Asian LNG gas prices have increased to the end of Q2, but remain well below the stratosphere values of 2022.
WTI prices have remained in a remarkably narrow trading range this quarter. Strong support has been observed below $67/bbl, and markets were unable to sustain prices above $80/bbl. Canadian producers were relieved to see WCS differentials narrowing this quarter as is historically common in Q2.
Inflation and Exchange Rates
The Canadian dollar has rallied significantly in the last quarter. The Bank of Canada has raised interest rates slightly more aggressively than the Federal Reserve, which could be a factor. However, exchange rate fluctuations can be notoriously difficult to explain after the fact. Central banks’ approach to inflation has been to raise interest rates aggressively, and a drop-in inflation rate has been observed since the 2021 peaks. American CPI was reported at 4.0 % for May 2023. This is the 11th consecutive month that inflation has slowed in the USA. The timeline to achieving the major central banks’ goal of 2% remains extremely uncertain. Many analysts see a long-term inflation rate well above the 2% goal. GLJ’s view is that although interest rates may be plateauing, they may remain at current levels for some time.