GLJ January Pricing Blog – US Oil Production Still Strong as Financial Markets Surge

Overview

Surprisingly to many analysts, including this one, US production has continued to grow despite land restrictions from the US federal government, moderate capital restraint and the reported arrival of Tier 2 development locations as the marginal barrel in the Permian. US crude production hit a record high while OPEC reports planned cuts to production. In the short-term, the oil market seems well supplied.

Otherwise, sentiment in general economic indicators seems to have shifted. Equity markets show strength as interest rates and inflation are perceived to be peaking. Yet, the longest foretold recession in history lingers on the horizon, but still is not here. Another event, also long foretold, but not yet occurring is the completion of the Trans Mountain pipeline expansions project. Trans Mountain is still not online after suffering yet another regulatory delay on the last few km of pipe. For the natural gas industry, North American gas is suffering the storage consequences of two consecutive warm winters.

GLJ has made no changes to our longterm expected nominal oil prices. This implies a small uptick in our longterm real oil price to USD 74.00/bbl in 2024 dollars for WTI. We have maintained our longterm real price of Henry Hub to $4.00/mmbtu in 2024 dollars. This results in a modest reduction in nominal North American gas benchmark prices.

Natural Gas Prices

Warm weather in key demand areas is a major factor, both in North America and Europe. European pricing reflects the weather, and significant reductions in German industrial usage. The strip price for 2024 suggests that relief for producers is not going to appear before a winter demand can reduce the storage overhang. The market seems to have adapted to the lack of Russian gas in Europe, at least in a warm weather scenario.

Oil Prices

The possible US production plateau has not occurred, and oil prices may have fallen below $70 without the negative trade route security situation in the Red Sea. However, oil is possibly oversold. It is easy to give reasons for price moves after the fact, but the ongoing strength in US domestic production is certainly a factor, as indicated in the chart below:

Source: U.S. Field Production of Crude Oil (Thousand Barrels per Day) (eia.gov)

Western Canadian Select (WCS) has followed its typical seasonal pattern of widening differentials in winter.  Edmonton light differentials were wide in late December due to apportionment issues.

Inflation and Exchange Rates

Significant reversals in market sentiment occurred in Q4 2023. The US dollar (USD) has fallen materially against major world currencies and equity markets surged and bond yields weakened. The US Federal Reserve, and other central banks have signaled a desire to no longer raise interest rates without a new inflation signal. The Canadian dollar (CAD) has been a significant beneficiary of this change and has moved above 0.75 USD.

Central banks’ approach to inflation has been to raise interest rates aggressively and a drop in inflation rate has been observed since the peaks of 2021. As mentioned in previous GLJ quarterly pricing commentaries, the timeline and feasibility of achieving the major central banks’ goal of 2% inflation remains highly uncertain. US 12-month avergage Consumer Price Idex (CPI) has not yet reported under 3%. If financial markets are predictors, then significant reductions in American overnight interest rates in 2024 may occur.

GLJ’s forecast values for key benchmarks is as follows: