Fueled by energy cost spikes, including natural gas, US inflation rose to an annual rate of 8.6% in May, the highest in more than 40 years.
The U.S. Department of Labor announced on Friday that its Consumer Price Index showed energy costs rose 35% overall last month from May 2021. Energy commodities, a sub-category including oil and gas, rose 50% annually and led the uptrend.
Natural gas prices hit a 14-year high in May — and did so again this month — amid fears of a global supply shortage caused by Russia’s war in Ukraine. Europe, which was already short on gas supplies before the war, is now working to wean itself off Russia’s supplies against the conflict. Countries across the continent are looking to US liquefied natural gas (LNG) exports to fill the gap, intensify global competition for valuable American supplies and push prices higher.
The Energy Information Administration (EIA) on Thursday reported 97 Bcf of gas injection into the Lower 48 reservoir for the week ended June 3. Construction increased inventories to 1,999 Bcf, but stocks in storage remained 14.5% below the five-year average during the season’s peak cooling demand.
“Barring some big new developments disrupting global demand, it’s hard to see prices falling much this summer — if at all,” Mike Matousek, chief trader at US Global Investors, told NGI.
Sure, an explosion Tuesday at Freeport’s LNG export terminal got market participants speculating about a possible destruction of demand through June that could give storage a boost. It probably wouldn’t be enough to solve long-term supply problems, analysts said.
“While we await further color at restart time in the coming weeks, the incremental storage of our end-of-season balance sheets in the 3.2 Tcf range” is keeping the storage rate “historically tight and will prevent us from tipping the towel on the positive.” risk-reward setup for now,” said analysts at Tudor, Pickering, Holt & Co. (TPH).
[Want today’s Henry Hub, Houston Ship Channel and Chicago Citygate prices? Check out NGI’s daily natural gas price snapshot now.]
Supply/demand imbalance
US crude prices, meanwhile, recently hit a seven-year high, thanks in part to solid domestic demand for gasoline and aviation fuel as the economy continues to gain momentum, travel picks up again and consumption picks up. The Russian invasion of Ukraine also put pressure on oil prices.
Western sanctions against the Kremlin’s energy complex – including US and European embargoes on Russian oil imports – sparked concerns that global supply could lag demand over the course of the year.
International benchmark Brent crude prices – already trading above $120/bbl in June, up about 50% in 2022 – will average $140/bbl between July and September and level into the first half of next year move around this level, according to Goldman Sachs Group analysts’ prediction.
China, the world’s largest crude oil consumer, has started easing pandemic-related restrictions this month, opening the door to greater international demand this summer, they noted.
Tight crude stocks also underpin domestic and global markets.
The latest bans on Russian oil could affect about 3.0 million barrels a day, according to the International Energy Agency.
While some of that oil will end up in China and elsewhere in Asia, Russian production is expected to fall by 1.0 million barrels per day by year-end from 10.8 million barrels per day in May, the Goldman team said . The United States and OPEC have increased production this year, but at a modest pace. Should this continue, analysts estimated that the global supply deficit would still be around 400,000 barrels per day in the third quarter, supporting the high price forecast.
Companies that had turned sour in the oil and gas sector are now rethinking their plans, Matousek said.
Case in point: Citing high prices, Tulsa-based Unit Corp. on Friday it canceled the proposed sale of its oil and gas properties and reserves to TPH.
The decision “reflects the opportunities being created by rising oil and natural gas prices” and a “belief that the Company can create greater shareholder value by operating the properties,” said Philip Smith, CEO of the unit.
price pain
Still, inflation is affecting the cost profile of energy companies and industry officials are sounding the alarm, much like the broader economy. Many oil and gas producers said during the last Q1 2022 earnings season that they are burdened with high fuel costs, in addition to rising costs for everything from personnel to equipment to materials.
Independent Texas-based Callon Petroleum Co. recently revised upwards its 2022 spending plans, citing higher-than-expected inflation in the cost of oilfield services. Houston-based Callon updated its full-year operating capital budget to between $790 million and $810 million, up from the $725 million guidance released in February.
CEO Joe Gatto said service costs have risen “as the industry faces significant inflationary pressures.”
The Federal Reserve, meanwhile, is in the midst of a rate hike effort. Interest rates were raised twice in the spring. Futures markets are widely expecting more rate hikes this summer.
The European Central Bank announced this month that it will hike interest rates in July for the first time in 11 years. It plans another rate hike in September.
Higher interest rates make borrowing more expensive, which can curb spending and cool inflation. However, in such an environment, Matousek says, companies also often become wary of investments – fearing interest rates will rise too quickly and too high, pushing the economy into recession.
Given that possibility, he added, exploration and production companies could find it difficult to significantly increase production of oil and gas this year, leading to imbalances and inflationary pressures on energy commodities.
Raymond James Financial’s managing director Mike Gibbs made a similar statement. He said with “high inflation uncertainty” and the Fed “in tightening mode,” companies could “go on the defensive in the near term.”
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