I always like to get in my energy predictions in early January, so this is a bit later than normal.
Last year’s predictions were especially tough, because Russia’s invasion of Ukraine really upended the energy markets. The ongoing war there is still going to be a major theme this year, and that adds an additional challenge to the predictions.
As always, I try to strike a balance between realistic predictions, and those that are too obvious. I consider the discussion behind the predictions to be more important than the predictions themselves. That’s why I provide extensive background and reasoning behind all predictions. It provides additional context, and often gives potential scenarios that could cause events to go in a different direction than expected.
The major trends this year will be the ongoing war in Ukraine, the continuing battle to tame inflation, and the energy sector transition to a lower-carbon future.
With those factors in mind, below are my predictions for some of the significant energy trends I expect this year. I always strive to make predictions that are specific and measurable. At year’s end, there are specific metrics that will indicate whether a prediction was right or wrong.
- The daily average price of WTI in 2023 will be between $83/bbl and $88/bbl.
Because oil is still the world’s most important commodity, I generally lead off with a prediction on the direction of oil prices. I make this prediction by looking at supply and demand trends, as well as inventory levels.
According to the Energy Information Administration (EIA), the average daily price of West Texas Intermediate (WTI) for 2022 was $94.90/bbl, significantly more than I predicted. This was primarily due to the war in Ukraine and subsequent disruptions to the energy markets.
As I write this, the price of WTI is $82.03/bbl, and it has been slowly rising over the past month. The futures prices for oil this year trend slightly down over the year, and are presently at $79.13/bbl for December 2023. Thus, the market isn’t currently expecting significant disruptions this year. Then again, it never is. Prices ultimately surged far above where futures prices were in January in each of the past two years.
Commercial crude oil inventories are nearly 20% lower than they were a year ago. The Strategic Petroleum Reserve (SPR), which was depleted last year in an effort by the Biden Administration to tame oil prices, is 37% lower than a year ago. The Biden Administration has indicated a desire to refill the SPR, but the administration doesn’t want to pay current market prices for oil. The low level of the SPR is a bullish indicator, and it increases the upside risk in the oil markets.
Global inventories are also lower than normal, and oil demand in China is expected to substantially pick up this year. All of these factors argue for upward pressure on oil prices. Although I don’t think we will reach an average as high as last year’s, I do think the yearly average will be somewhat higher than the current price.
- Total U.S. oil production will again rise, and set a new annual production record.
U.S. oil production rose last year for the first time in three years. This was one of the 2022 predictions that I got right. Presently, production is 4.6% higher than a year ago at 12.2 million barrels per day (BPD), but still a bit short of the 2019 annual record of 12.3 million BPD, and well short of the November 2019 monthly record of 13.0 million BPD.
If we look at the pattern in 2019, that year started off at 11.9 million BPD, ahead of the current pace. Oil prices were in the low $50s then, well short of where they are now. That would argue that a new oil production record is in reach for this year.
However, production has flattened in recent months. Oil production is 12.2 million BPD today, but it was 12.3 million BPD last September. To set a new annual production record, production is going to need to move higher by an average of about another 200,000 BPD for the rest of the year. That’s not out of the realm of possibility.
Further, there are 27% more rigs drilling for oil than one year ago. We still haven’t returned to pre-Covid drilling levels, but the ongoing rebound in rigs is likely to spill over into oil production that continues to grow in 2023.
Honestly, it’s a coin flip on whether this will translate into a new annual oil production record in 2023, but I am going to bet that we see slightly more production this year than in the previous record year.
- The average natural gas price will be at least 25% lower than it was in 2022.
Last year the average Henry Hub natural gas spot price soared to $6.45/MMBtu, which was the highest annual average in 14 years. This was a consequence of Russia’s invasion of Ukraine, and the subsequent tightness in the gas markets that created.
It’s not much of a prediction to suggest that natural gas prices will be lower this year. They almost certainly will. U.S. natural gas production is currently at a record high, and continues to ramp up. We will almost certainly set a new record annual production high in 2023.
Growing natural gas supplies will help offset the shortfalls being experienced by European countries that typically get natural gas from Russia. That initial dislocation was the cause of last year’s spike, but prices had abated by year-end.
I think it is likely that natural gas prices will break lower this year by at least 25%.
- For the first time in three years, the energy sector will not be the top performing S&P 500 sector.
It’s kind of funny to think about all of the prognosticators that wrote off the energy sector as dead just a few years ago. The past two years it has blow away every other sector in the S&P 500, returning 55% in 2021 and 66% in 2022. For all of those organizations that divested your energy stocks, that was a costly decision.
Barring a collapse in oil and gas prices, I think the energy sector will have a decent year. But I don’t think it can keep up with the pace of the past two years. There are signs that other sectors are starting to pull ahead of the energy sector. In the past 90 days, energy is only the 7th best performing sector (out of 11 sectors), with a return of +3.8%. That is behind the S&P 500 (+4.8%), and well behind the double-digit gains of communication services (+13.6%), materials (+12.6%), and real estate (+11.1%).
- The Invesco Solar ETF (TAN) will return at least 20%.
This is a repeat of a prediction I made last year.
The Invesco Solar ETF (TAN) is based on the MAC Global Solar Energy Index (Index). TAN invests at least 90% of its total assets in the solar energy companies that comprise the Index. It is therefore a good benchmark for the solar sector.
By August of last year, TAN had a return of 18% year-to-date. However, rising interest rates hit the market hard in the second half of the year, and that 18% gain ultimately turned into a small loss on the year.
Nevertheless, the long-term fundamentals for the solar sector are sound. There is no question the solar sector will continue to experience huge growth rates, both in the U.S. and globally. Thus, despite the setback in 2022, this is a strongly recommended sector for long-term investors. I believe we will see it close the year with at least a 20% return.
I would add that I made a similar repeat prediction for ConocoPhillips in 2021. Prior to Covid, in early 2020 I made ConocoPhillips one of my top stock picks of the year. I predicted it would return at least 20% for the year. But, Covid hit the energy sector hard, and ConocoPhillips closed the year down 37% for the year.
But the company’s fundamentals were still solid, despite the pandemic. So, I doubled down in 2021, predicting that ConocoPhillips would return at least 30% for the year. How did it do? Shares returned 87% in 2021.
The point here is that long term, the TAN prediction should hold up, because the fundamentals are good. Shorter term, things can happen to throw off a prediction. But, just as ConocoPhillips did in 2021 (and 2022, when shares were up another 72%), I believe TAN will bounce back nicely.
There you have my 2023 energy sector predictions. There will still be a lot of uncertainty over Russia and Ukraine, and whether the economy ends up in a recession. If we do end up in a deep recession, then the oil price prediction will probably be way off.
As always, I will grade them at the end of the year.
By Robert Rapier
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The fundamentals which are a tight global oil market, a robust oil demand underpinned particularly by China’s return to the market, the shrinking global spare oil and gas production capacities and underinvestment in oil and gas will continue to prevail in 2023.
These fundamentals have never been stronger since the oil price collapse in 2014. If they managed then to take Brent crude to $147 even without the shrinking capacity factor, can’t they take it to $100 and with the production capacity continuing to shrink?
Against this background, I project that the global energy crisis is here to stay well into the future probably permanently. This will be conducive to higher oil prices continuing to rise in 2023 and far beyond with Brent crude breaking through $90 a barrel during the first or second quarters of 2023 and even hitting $100 during 2023.
Moreover, OPEC+ is projecting a rise of demand in 2023 by 2.5 million barrels a day (mbd) from 101.3 mbd in 2022 to 103.8 mbd this year.
China’s crude oil demand in 2023 is projected to hit 17.1 mbd necessitating crude oil imports of 13.20 mbd and accounting for 50% of demand growth in 2023 or 1.25 mbd.
Meanwhile, the US Department of Energy (DoE) will find it extremely difficult to refill the Strategic Petroleum Reserve (SPR) in the foreseeable future. The reason is that US oil is a spent force incapable of raining production beyond 9.8-10.3 mbd.in 2023. Moreover, there is no spare oil in the market.
Equally natural gas and LNG prices are expected to continue surging in 2023 because the global gas market is currently very tight with the production capacity fully booked. Capacity might ease a bit with Qatar’s LNG capacity expansion from 77 million tons (mt) currently to 110 mt by 2024/25 and 127 mt by 2028 and the United States’ by 2025.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert