Since Russia’s war in Ukraine escalated last year, global markets have been concerned with the integrity of O&G supplies.
Yet, crude oil prices have remained near their long-run average levels while global and U.S. natural gas prices have been historically low.
Economic uncertainties, reflected by the Federal Reserve’s interest rate hikes and China’s ongoing challenges, have helped to keep prices in check even as the underlying supply and demand balance has tightened. Moreover, Texas has increasingly enabled regional production through the value chain, accounting for the vast majority of U.S. production growth so far this year. Policies that influence production, manufacturing, transportation and trade of U.S. oil and natural gas are therefore critical to domestic and global energy stability.
In July, the EIA revised its outlook to show a combination of record-high demand — 101.2 million b/d in 2023 — with lower supply, resulting in a global market deficit of 1.0 million b/d for Q3 2023.
Consequently, U.S. ending stocks of crude oil as of July 14 reached their lowest level for July since 1986, so oil markets must reconcile tighter underlying fundamentals with concerns for economic uncertainties.
By contrast, natural gas markets remain regional and seasonal. As of mid-July, natural gas prices were about $2.60 MMBtu at Henry Hub, Louisiana, over $7 per MMBtu in the U.K., and $11 per MMBtu in Asia Pacific per CME Group. In July 2022, these prices were over three times higher, before a relatively warm winter eased concerns for the loss of Russian natural gas that historically represented over 30% Europe’s supplies. Europe has managed by lowering demand and purchasing cargoes of LNG that otherwise would have served other markets. Over 80% of U.S. LNG exports have served European consumers in 2023 per the EIA.
If seasonal weather returns to normal this winter and China’s economy recovers as markets expect, Europe’s natural gas needs could reemerge as the epicenter of global trade. Already the world’s largest exporter, U.S. natural gas net exports could grow to 15.2 bcf/d, or 14.8% of U.S. production in 2024 per EIA. However, the recurrent U.S. experience has been one of production motivating productivity that, in turn, has supported natural gas inventories despite record-high exports and strong domestic consumption.
Importantly, Texas has been the cornerstone of U.S. growth, accounting for over 40% of our nation’s oil production growth and more than one-third of its natural gas production growth this year.
As the U.S. energy revolution matures and myriad challenges to expand interstate pipeline infrastructure remain entrenched, Texas’ criticality as a producer, transporter, processor, refiner and exporter has never been greater.
If history is a guide, relatively small changes in O&G supply and demand have historically brought about relatively large and rapid changes in prices since it can be hard to substitute or change behavior in the short run. We experienced this during the 2020 pandemic’s downturn and the opposite with escalation following Russia’s war in Ukraine last year.
Although no one can predict the future, the most assured way to keep downward pressure on consumer prices — and protect the integrity of U.S. economic and energy security — is to support robust domestic production and infrastructure, recognizing Texas’ elevated role. This requires cogent energy plans and policies at state and federal levels, and there is no better time than the present to think forward.
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