Lower 48 oil and gas economics Q4 2023: three key takeaways

As we are getting closer to the end of winter, we took a look back at what happened in the first quarter of the year for gas production and prices. This insight follows our November 2023 report Winter Gas Production Surge that explored the regional production growth, dived into what we expected was real and what was inflated due to pipe estimates. 

In a latest report Lower 48 Oils and Gas Economics Q4 2023, we look at market movements since the last update and explore the factors most likely to impact on our forecast for the rest of 2024. Read on for an introduction to our three key takeaway messages.  

1. US Gas prices faded further 

As a bearish-demand El Nino winter further impacted already bearish fundamentals. Prior to CHK’s announcement holding back turn-in-live (TIL) and drilled-but-uncompleted (DUCs), along with EQT’s announcement of curtailing March volumes, our end of summer storage projection was north of 4.6 trillion cubic feet (TCF), even with the lower forward prices baked into summer burns. Real time tracking of gas fuelled electrical generation as a percent of thermal had not yet outperformed last year convincingly, and this strongly suggested the need for a producer response this summer – which we have begun to see with CHK, EQT and others. SWN is likely to remain radio silent for another quarter as the CHK merger is now pushed to 2H, though our daily model tracks SWN’s production closely in the Northeast and Haynesville. 

Significant gas burns for power will likely need to be price-incentivized in daily cash through much of the summer, and salts storage will likely remain high requiring a contango in the curve. However, the price levels at which producers curtail or bring back significant volumes introduces a new wildcard.  

2. International gas markets have softened with a warm winter 

European storage is at a healthy 62% full versus a 5-year average of 44%. International gas prices are essentially near the bottom of coal substitution bands. Arbitrage remains open though cargos to Asia are limited to Cape of Good Hope as cargos avoid the Suez due to Houthi violence and the Panama Canal continues to suffer lower water levels in Lake Gatun.  

Within a few short years, North American LNG will grow 9 million barrels per day (Bcf/d) and Qatar’s North Field East will place more LNG supply on water that will need to be absorbed. However, security of power supply is strategically important and India and China both continue to pivot toward coal. India’s ministry of power has extended its advisory to import coal for blending purposes until June 2024 instead of March, while China approved another 114 GW of coal powered capacity in 2023, continuing the boom that followed a wave of electricity shortages in 2021. The China NDRC also now wants 80 GW of pumped hydro by 2027, and an upgraded coal fleet that can respond to power demand, with new gas gen for areas with a stable supply of affordable gas. While solar and wind are desired at 20% of fleet vs current 12%, asking coal and pumped hydro to serve as peaking power suggests less gas dependence is also desired.   

2. Oil markets remain supported by Saudi Arabia 

Saudi Arabia will extend oil production cuts throughout June 2024 in coordination with others, and noted volumes would be returned gradually, subject to market conditions. Kuwait and UAE will also continue reductions. The February OPEC OMR has world oil demand continuing to grow through 2024, from 103.3 (mb/d) in Q1 to 105.5 mb/d in Q4, to average 104.4 mb/d, which is 2.25 mb/d over 2023 actuals of 102.16 mb/d.  

Non-OPEC liquids plus OPEC NGLs are only forecasted to grow 1.25 mb/d in 2024, implying a greater call on OPEC crude of ~1 mb/d over the prior year. This is predicated on US crude growing 0.6 mb/d, which is close to Wood Mackenzie Short Term forecasts of 0.49 mb/d growth including Alaska. For more detail on this, download the report extract.  

US economic conditions  

As a final point to give context around the takeaways explored above, it is important to note some of the wider economic conditions driving oil and gas economics in the US over the last quarter.  

In the US, headline inflation is at +2.4% for January. Over the last 3 months, the market has recognised some of the underlying simmer in inflation and expectations for rate cuts centre around 75 basis points by Dec, compared to a prior expectation of ~150 basis points of total cuts by Dec even just a month ago.  

Unemployment remains low at 3.7% vs last quarter’s 3.9%, and plenty of cushion remains with JOLT job openings at 8.863M for January. Q4 US GDP was up 3.3% with PCE spending up 5.4% in the same time period.  

Growing economic productivity is arguably remains needed, whether AI driven or otherwise, if the US is to outgrow what Jamie Dimon and others have described as a cliff only 10 years away, should debt snowball toward “the most predictable crisis we’ve ever had.” In that same time period, transition toward renewables will continue to gain steam onshore, while dependable US energy exports hopes will continue to make headway on climate goals abroad. 

There is also a potential interest to basis markets as gas production growth is now concentrated west of the Sabine River (TX, LA border) as Haynesville and Northeast are flat to down, while Permian as an oilier option continues to grow. 

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