Market Watchers: Oil, Gas Demand to Overtake Supply by Year’s End

Dennis Kissler has fed his passion for analytical research and the trading of crude oil and natural gas futures and derivatives for more than 15 years at BOK Financial Securities – but he’s been managing commodity risk and developing hedging strategies for decades. In this edition of Market Watchers, Kissler shares his insights with Hart Energy’s Deon Daugherty, Oil and Gas Investor’s editor-in-chief, on some of the greatest gambles ahead.

Deon Daugherty: How do you view the domestic E&P sector’s performance [production, growth, M&A] in 2022? What are companies doing well, and in what ways should they consider changing course? What are your expectations for the space this year?

Dennis Kissler: Energy prices have improved dramatically. And at the same time, most energy companies have practiced a more disciplinary approach to capital spending, which has increased profitability exponentially for companies that have had a good risk management program.

Going forward into 2023, it will become more challenging as volatility in prices should continue. Therefore, companies should continue with realistic budgets and view oil and gas prices in the ’24,’25 and even the ’26 year strips to make procurement drilling decisions and understand where breakevens versus profitability are versus their basis locations.

DD: To what extent might infrastructure underinvestment impact the U.S. market, and how might it limit the U.S.’ competitive position globally?

DK: I believe underinvestment is currently in play and that at year-end 2023 and into 2024 demand will once again begin to overtake supply. Of course, a major global recession or COVID lockdown in Asia could reset everything. U.S. shale could very well plateau production in the next 24 months—net perhaps of the Bakken.

Jet traffic and Asian road traffic is once again back to or above pre-COVID levels. Further drilling and production regulations if implemented could expedite the issue. Keep in mind, whomever controls your fuel supply also controls your food supply. You cannot plant corn and wheat without diesel.

DD: What can the energy industry as a whole do differently to attract growth investors back to the space?

DK: Companies must return capital back to the investors and shareholders and show proper risk management. Hedging policies are in place. Also, an advertising-type program that shows fossil fuels are a need and not just a want.

The transition away from fossil fuels takes time—a lot of time—and that needs to be communicated. The Tesla will not drive itself without the natural gas to produce the electricity. Europe is beginning to understand this now, but a broader educational campaign is needed.

DD: What is driving the volatility in global crude prices?

DK: Supply and demand is becoming very erratic given the COVID shutdown in Asia and then the reopening and the Russian-Ukraine war.

Extremely high margin requirements by the exchange have taken a lot of the small speculators out of crude and natural gas futures, and when that happens, the liquidity suffers and becomes a “thin” type market which causes wide price swings. A lot of people don’t understand the importance of market liquidity that small speculators bring to the market.

DD: What happened to the expectation of resurgent demand from China post-COVID? How has it impacted global markets?

DK: The demand caused by China’s reopening has been a bit slower than expected mostly from the tighter monetary programs from world banks’ increasing interest rates.

Keep in mind China is a major exporter of goods and world economies have been pausing a bit due to higher interest rates. That being said, China is a large consumer of petroleum products and we should see their demand continue to rise in the coming weeks.

DD: How do you envision the long-term impact of Russia’s war on Ukraine and its essential weaponization of energy?

DK: It has been and will continue to change the face of European energy dependence. The U.S. should be the biggest beneficiary as LNG and fuel demand in Europe will look toward North America for supply. I believe this would continue even if some sort of “truce” or peace talk were executed. This will be a long-lasting effect.

DD: What are your views on the validity and efficacy of OPEC+, given Russia’s aggression during the past year?

DK: OPEC+, I believe, will stick together. Longer term, I also believe their production outlook could be overstated. Nineteen of the 23 members are having trouble meeting production metrics at this time. Saudi Aramco may accomplish a reinvestment back into production which, if it occurs, will take years to come to market. In the next two to three years, I believe Russia, along with OPEC, will be challenged to make production quotas and could be well short of production expectations.

DD: How do you view the success or failure of U.S. sanctions and EU price caps relative to Russia?

DK: Sanctions have had a negative effect on Russian income. However, as long as China and India continue to take Russian production, the effects have been minimized.

DD: Given the dramatic shift in the oil and gas global market in response to Russia’s aggression, how do you view the future of supply/demand in Europe specifically and, more broadly, around the world?

DK: It has been and will continue to change the face of European energy dependence. The U.S. should be the biggest beneficiary as LNG and fuel demand in Europe will look toward North America for supply. I believe this will be a long-lasting effect and a positive to North American prices.