In a surprise move, OPEC+ members announced a cut in oil production by 1.66 million barrels per day. The announcement sent prices soaring on international markets with Brent crude prices rising to $85.73 on the international exchange and $81.41 on the NYMEX. However, while oil prices were on the rise, natural gas prices in the U.S. dropped to an unusually low level of $2 per million British Thermal Units (mmBtu).
According to OilPrice.com, U.S. natural gas prices have hit a three-year low due to mild weather and the oil industry’s drilling spree. This has resulted in associated gas accounting for almost a third of natural gas output. As a result, natural gas storage is 21% higher than the five-year average for this time of year.
While the move to reduce supply is fairly odd, the oil market is expected to see a significant deficit over the second half of 2023, according to an analysis from ING, a global financial services corporation, as reported by World Oil magazine. The oil market is expected to tighten as the industry moves through the year, leading to higher oil prices.
Before the announcement of the production cuts, ING was already forecasting Brent to average $97 per barrel over the second half of 2023. However, with the production cuts, ING now expects the market to average $101 per barrel over this period.
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Warren Patterson, ING Head of Commodities Strategy, warns of the risks to this projection, particularly the demand outlook. While global oil demand is forecast to grow by around 2 million b/d in 2023, a significant amount of this growth is concentrated in China, which poses a risk to the demand outlook.
Furthermore, central banks around the world could tighten monetary policy, leading to a stronger-than-expected slowdown later in the year, which could also impact the oil market.
In conclusion, while the production cuts by OPEC+ have sent oil prices soaring, the natural gas market in the U.S. has hit a three-year low. The oil market is expected to tighten, leading to higher oil prices, but there are risks to this projection, including the demand outlook and the possibility of a global economic slowdown.