Markets
Oil and Gas Industry Trends: Wrapping Up 2023
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Demand is down, inventory is up, and fear is sky-high for oil to round out 2023.
Prices spiked in early October when the Israel-Hamas war broke out but came back down once concern receded around the wider geographic region becoming embroiled. The OPEC+ production cuts in addition to Russia and Saudi Arabia’s output cuts haven’t hurt consumers too much as they continue to adjust to remote work, adopt electric vehicles, and reduce discretionary driving activity due to inflation.
Price volatility is therefore mostly a function of fear of a supply shortage. Fear of a cold winter in Europe, fear of a broader conflict in the Middle East, and fear of a liquified natural gas strike in Australia, among other things.
Crude Oil: A Surprise Surplus
Heading into the third quarter of 2023, the market was very concerned about the likelihood of extremely short supply. The 2.3 million barrels per day expected drawdown on global inventories was sizable.
However, due to decreased demand, we expect the fourth quarter to show an increase in inventory stocks compared to a decline since our last report.
The decreased demand is likely to continue next year. The Energy Information Administration’s 2024 forecast is the lowest per capita for gasoline consumption in the last 20 years.
The Global Oil Rig Picture
Global rig counts appear to be on track for modest year-over-year growth.
The North American region has lost more than 150 active rigs, a 3% contraction, but sentiment seems to be improving in recent weeks. The less-volatile international market should remain steady due to ongoing uncertainty, curtailing investment activity.
The offshore rig market remains robust as fleet capacity remains near full utilization. Longer-term offshore contracts ensure that utilization endures over the next several quarters.
Natural Gas: Global Inventories Continue to Grow
In the European Union, storage levels of natural gas are essentially 100% full and the Israel-Hamas war appears to be immaterial to the market. The region appears to be in good shape for the coming winter, well ahead of expectations.
The US natural gas inventory continues to be somewhat ahead of historical averages due to warmer-than-usual weather over the past few months, which reduces heating demand.
China’s natural gas consumption growth is gaining momentum. The government requested state-owned gas suppliers fill up storage facilities ahead of the peak winter heating season. The supply and demand situation should be balanced, which Morningstar analysts think is positive for Chinese gas utilities as gas shortages during winter will result in lower dollar margins due to higher procurement costs.
Natural Gas Liquids: Market Stays Strong
The natural gas liquids market, in particular, liquefied propane gas (LPG), continues to be very strong. The market continues to average over 2 million barrels per day, with about two-thirds of those volumes heading to Asia. The U.S. export market is essentially operating at full capacity, an estimated 2.1 million barrels per day.
The issue is the Panama Canal constraints. The historic drought in the Canal has reduced freshwater flows by more than 50%, and daily vessel transits are expected to decline from around 40 to 18 by February. This means that timeframes for transporting LPG can extend to 40-45 days from 27 days as vessels would need to use the Suez Canal or the Cape of Good Hope. As a possible result, the shipping vessel market will tighten and make it harder to sustain current LPG export levels.
Check out the full report for more in-depth analysis as well as Morningstar analyst’s full coverage and top picks for the energy sector.