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All of a sudden, we are seeing some new realities in the energy sector that could push prices higher.
First, let me address natural gas. Thanks to more efficient horizontal drilling in shale deposits, drilling down two miles or more is becoming increasingly common, so the U.S. is now in the midst of producing record amounts of natural gas. There is a Freeport LNG terminal on the Gulf Coast in South Texas that has been shut down since June after a fire, causing natural gas inventories to rise, pushing down spot prices, but this vital LNG terminal finally restarted last week. This will help natural gas prices firm up. Also, the weather always impacts natural gas demand, so the milder winter kept prices low, but as the U.S. and Europe are hit by more Arctic air fronts in late winter, natural gas prices could start rising.
Second, let me address some new realities in crude oil. As usual, crude prices are expected to firm up as seasonal demand rises in the spring, especially since the million barrels a day that were released from the Strategic Petroleum Reserve (SPR) for 200 days in 2022 have ceased. However, West Texas Intermediate (WTI) crude oil prices are lower than Brent Crude due to a temporary glut in the U.S. as domestic daily production has steadily improved to 12.2 million barrels a day, up from 11.6 million barrels a year ago.
The wider the spread between WTI and Europe’s Brent crude oil, the more money refiners can make. Now that China, Europe and the U.S. are in an economic recovery, as global demand rises, crude oil prices are expected to hit $100 per barrel in the spring, and $120 per barrel is possible in summer.
Third, Russia’s production is increasingly going off-line, and its domestic energy business is in chaos. Sanctions on the Russian central bank are now inhibiting international energy sales. Although Russia is expected to continue to sell crude oil to China and India, where it can be refined and resold, its pipelines are now backing up, which is expected to cause Russia to shut down many of its wells. The sanctions on Russia are now very harsh and will only get worse if Russia launches a new offensive in Ukraine.
There is no doubt that NATO is effectively in a proxy war with Russia after both Germany and the U.S. approved new tanks being sent to Ukraine. Currently, Ukraine has more Russian tanks than Russia after cutting off their railways and seizing their military equipment, diesel fuel and other supplies. The Russian spring offensive could be pivotal and decisive, so more sanctions are anticipated. Those sanctions are expected to cause Russia to shut down more of its crude oil and natural gas wells. Already, Russian crude oil production has fallen by one million barrels per day in the past year, and another 2-3 million barrels may be lost as Russia is forced to shut down more of its domestic crude oil production.
In fact, on Friday, Russia announced that it was cutting its March crude oil production by 5%, or 500,000 barrels per day. Deputy Prime Minister Alexander Novak said, “As of today, we are fully selling the entire volume of oil produced. However, as stated earlier, we will not sell oil to those who directly or indirectly adhere to the principles of the ‘price cap’.” Either way, there will be more Russian crude oil cuts in the upcoming months as sanctions bite, pipelines back up and force Russia to cap more wells.
In summary, I cannot envision any scenario where crude oil prices do not rise in 2023. Even if the war between Russia and Ukraine ends within a few months, sanctions against Russia are expected to remain, since Ukraine and NATO will be demanding war reparations from Russia. Obviously, there could be a leadership change in Russia, but that should not cause economic sanctions to be lifted anytime soon.
At home, natural gas accounts for approximately 38% of U.S. electricity production and will continue to steadily rise, since it is the cleanest fossil fuel. In theory, if everyone in the U.S. switched to an electric vehicle (EV), the demand for natural gas would soar! As a result, I remain confident in my big energy bet and am confident that both natural gas and crude oil prices will continue to rise in the upcoming months.
Even the President agrees! In his State of the Union speech, President Biden mentioned, “We are still going to need oil and gas for a while.” In an apparently unscripted moment, he conceded that the U.S. will need fossil fuels by saying “We are going to need oil for at least another decade” that caused quite an outburst on both sides. Interestingly, President Biden did not call for any additional SPR releases to offset lost Russian production. Not surprisingly, President Biden’s comments about Ukraine bravely fighting Russian were applauded, especially considering the billions in aid that has been authorized by Congress.
Caution Flag: Long-Term Treasury Yields are Starting to Rise Again
In the wake of the strong January payroll report and a resurging service sector – based on the ISM non-manufacturing (service) report – Treasury yields are moving higher again. For example, the 10-year Treasury bond yield rose by over 20 basis points to over 3.6% from its intraday low last week. The Treasury yield curve remains inverted, as the 2-year Treasury yield has also risen over 30 basis points in the past few days. Clearly, the bond market is hedging its inflation bets on the fear that prices may not cool as fast as previously anticipated. (Currently, the Atlanta Fed sees 2.2% first-quarter GDP growth.)
Fed Chairman Jerome Powell on Tuesday was interviewed at the Economic Club of Washington, D.C. As expected, Chairman Powell stuck to his script, but also re-iterated that inflation was decelerating. In his best doublespeak, he said, “So we think we’re going to have to do further (rate) increases, and we think we’ll have to hold policy at a restrictive level for some time.” Generally, Powell expressed that it would take a bit longer to get inflation to the Fed’s preferred 2% level in the wake of January’s strong payroll report and painted a picture that interest rates will be rising even if inflation continues to decline. Interestingly, Powell also said, “We’re going to react to the data,” which is a very dovish comment, in my opinion. When service inflation was discussed, Powell said, “That’s what I worry about.” Overall, it looks like Powell’s comments triggered a big-short covering rally, since he had some dovish comments.
Speaking of the jobs report, there was a fascinating MarketWatch article last Wednesday that asserted that there were massive seasonal adjustments to the January payroll number, which grossly exaggerated and overstated the actual payroll results. The fact that these seasonal adjustments made the January payroll surge just before the State of the Union speech is obviously an interesting coincidence. Also interesting is the fact that Labor Secretary Marty Walsh resigned before the State of the Union, even though he was deemed the “designated survivor” among the Biden Administration’s original cabinet members.
This MarketWatch article also pointed out that the next five months will have “negative” seasonal adjustments, implying that the upcoming monthly payroll reports may be disappointing, which may cause the Fed to hesitate on raising key interest rates further.
In other labor news, the Labor Department announced on Thursday that weekly unemployment claims rose to 196,000 in the latest week, up from 183,000 in the previous week. Continuing unemployment claims rose to 1.688 million, up from a revised 1.650 million in the previous week. Overall, it appears that some of the high-profile corporate layoffs are starting to show up in weekly unemployment claims.
Also, the Commerce Department announced on Tuesday that December trade deficit resurged to the highest level in a year, to $67.4 million, as imports rose 1.3% and exports fell 0.9%. This may cause downward revisions to fourth-quarter GDP estimates. Interestingly, in the past year, China’s exports to the U.S. expanded 7%, while Japan’s exports surged 11.5%, partly aided by their weaker currencies.
U.S. energy exports stalled somewhat in December due to unseasonably warm weather in Europe, but these energy exports should resume rising in the upcoming months as seasonal demand increases.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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