Strong and steady U.S. oil and natural gas production has in 2023 outpaced demand and weighed down prices. Analysts are increasingly joining a chorus of calls for a pullback on output – or even sharper price pressure moving into the spring.

Natural Gas Prices

West Texas Intermediate crude traded around $75/bbl early this week, far from the highs above $120 last year. New York Mercantile Exchange gas futures recently hovered around $2.500/MMBtu, down from the $6 level late in 2022 and the nearly $10 highs of last summer.

The price strength in 2022 spurred production increases, but demand has since tapered substantially. Crude consumption declined in recent months amid weakening economic activity in the United States as well as Europe and parts of Asia. Natural gas demand eased dramatically in January, largely because of seasonally mild weather. Forecasts point to only an average February in terms of heating needs.

“Global oil prices have been in a turbulent downtrend since the middle of 2022,” said Bank of America (BofA) strategist Francisco Blanch. “Furthermore, warmer weather has limited heating demand for oil and caused global gas prices to collapse, which may facilitate an unwind of some gas-to-oil switching from 2022. These factors have contributed to oil price weakness.”

Demand for U.S. exports of gas also has leveled off – albeit at solid levels — amid benign weather in Europe and following an aggressive push to fill up storage on the continent last year.  The Freeport LNG facility in Texas, sidelined because of a fire last June, also has curbed demand for gas. The facility expects to relaunch in coming weeks.

The late summer and early fall of 2022 was “a very precarious time” as the European Union (EU), “raced to fill storage to comfortable levels for the winter,” Rystad Energy analyst Ade Allen said. “That phenomenon has since tempered, and fewer cargoes have been heading to Europe in the past few months since EU storage reached 94% capacity in mid-November.”

Both Rystad and BofA analysts have cautioned that oil and gas producers could this year respond to lower prices by scaling back.

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Analysts at East Daley Analytics had forecast natural has production growth of nearly 5 Bcf/d this year – up from around 100 Bcf/d to start 2022 and easily setting a new record level. “Based on our latest macro natural gas model, we see a need for a shock to the system to slow production growth,” the East Daley team said. Absent a pullback, “natural gas prices under $2 are clearly in view, and there may not be a lot the market can do to prevent them.”

On the crude front, the U.S. Energy Information Administration’s (EIA) latest Weekly Petroleum Status Report showed production for the period ended Jan. 27 at 12.2 million b/d – even with the average for the past month. That also matched the high mark reported by EIA since the onset of coronavirus outbreaks in the spring of 2020.

The latest print also topped the year-earlier level of 11.5 million b/d, though production continued to trail the pre-pandemic record of 13.1 million b/d set in early 2020.

Globally, OPEC-plus in November launched a program to cut production by up to 2.0 million b/d. It has since signaled it plans to continue generating lighter output.

In OPEC’s January oil market report, researchers forecast global crude demand would expand by 2.2 million b/d this year. But they also emphasized this was based largely on expectations for increased oil consumption in China, following that country’s recent easing of pandemic-related restrictions.

However, researchers at the Saudi Arabia-led cartel also noted the Chinese government’s propensity to halt economic activity during coronavirus outbreaks. With spread of the virus still a threat, OPEC researchers cautioned their outlook is subject to a downgrade.   

They also noted multiple pockets of geopolitical stress, including Russia’s war in Ukraine, as well as the threat of recession in the United States, Europe and parts of Asia. “This forecast remains surrounded by uncertainties,” OPEC researchers said.