Low Oil Prices are bullish for Natural Gas Prices - June 4

[dan_s]

Notes below are from 22V Research, with my comments in blue.

A sudden and substantial slowdown in U.S. field activity is underway. This slump is increasingly validating our “substitution not addition” analysis for a capital-intensive U.S. shale industry that needs $68 WTI equivalent to clear the marginal cost of capex. If this all-important price threshold is not met, investment screeches to a halt on the margin as banks pull credit lines and private equity owners shut down the affected portfolio companies.

The Baker Hughes data show four more U.S. oil-directed rigs were cut last week (May 30), bringing the cumulative drop to –28 rigs (–5.7%) since April 4. Laydown of these rigs also cuts the associated gas supply. The associated gas supply left in the ground becomes skipped gas molecules for which there is no offsetting OPEC+ cavalry coming to replace.

We continue to project the foregone U.S. development is a decline of about 500 thousand b/d in oil and 2.5 Bcf/d in natural gas, inclusive of NGLs (e.g., ethane). These are losses in capex that would have partially backfilled natural decline rates in the productivity of U.S. wells. The effect is strongly bullish for U.S. natural gas prices. It is now highly likely cash Henry Hub gas prices will exceed $5 per MMBtu in winter 2025/26, if not sooner.

In oil, the economics limit the upside for WTI to $68 unless there is a reversal in OPEC+ production policy or until there is a renewed call for higher-cost light tight oils. However, the economics do not constrain a material run higher by oil product prices that are already historically cheap against all other real prices in the global economy. < The longer that WTI stays under $68/bbl, the higher the probability that WTI will move back to the "Right Price" range of $75 to $85 in 2026. My forecast models are now based on WTI averaging $67.50/bbl in Q4 2025 and $70/bbl average price in 2026, but IMO WTI over $80/bbl within 12 months is becoming more likely.

Understanding what OPEC+ said

The pledge to restore another +411 thousand b/d of oil supply activates capacity voluntarily idled by eight OPEC+ members under a November 2023 side agreement for an “additional adjustment” (–2.20 million b/d) on top of the OPEC+ full group production cuts (–2.00 million b/d) announced in October 2022. The eight-nation cohort also agreed to a separate adjustment (–1.65 million b/d) in April 2023. Altogether, total OPEC+ pledges to idle capacity between October 2022 and April 2025 amounted to –5.85 million b/d, of which 95% were pledged by the eight members who met this past weekend.

On December 5, 2024, OPEC+ announced it would gradually activate more than 2 million b/d of voluntarily idled capacity starting on April 1, 2025. Before this weekend, specific targets were systematically rolled out on March 3, April 3, and May 3 in support of this plan. Cumulatively to date, OPEC+ has pledged to restore more than 1.3 million b/d by July 1, or 22% of total voluntarily idled capacity.

But production quotas and actual production levels are different beasts.

This reality means actual supply effects can and do differ, sometimes widely, from headline promises on “required production” quotas. Consider just two examples to substantiate this idea.

Example One: Kazakhstan has already been producing +375 thousand b/d above its OPEC+ production target. Output is +25% above its quota. This non-compliance is supposedly one reason why the eight nations elected to restore their capacity faster than an earlier plan. Whether that reason truly was part of the rationale, the Kazakh non-compliance proves OPEC+’s “production cuts” were never fully implemented in the first place. Over and under compliance is rife across other members’ actual production levels. These deviations from plan help explain why market prices react differently than one might expect on headlines alone, even if a pledged supply return is fully implemented. And to that point, full implementation has not occurred to date, which brings us to our second empirical observation.

Example Two: We now have preliminary data in hand for OPEC+ production in April 2025 and May 2025. On headlines, the eight nations pledged to restore 549 thousand b/d of production over those two months. In fact, data from OPEC and Rystad indicate actual production increased by about 210 thousand b/d, or less than half (38%) of the straight read of the headline promise. Moreover, in terms of net effect on the global supply and demand balance, this 210 thousand b/d tranche offsets the 200 thousand b/d of Venezuelan supply removed from the global market by President Trump’s cancelation of Chevron’s sanctions waiver with an effective date of May 27. We read the sizing and timing of these events as non-coincidental.

We do expect OPEC+ to continue to bring back supply gradually. But we shall see how much supply returns as of any certain date. Often overlooked in discussions about OPEC policy is this express statement from the group: “The gradual increases may be paused or reversed subject to evolving market conditions. This flexibility will allow the group to continue to support oil market stability.”

In other words, OPEC+ will restore whatever capacity suits its interests.

Conclusion
We view the OPEC+ strategy as opportunistic and rational. It was the global demand shock unleashed by U.S. trade policy, not OPEC+ supply action, that forced the WTI price below $68. This sudden change ended the WTI pricing regime that had been in place and had supported higher-cost U.S. shale producers for the prior decade (2015-25).

Once that price break had occurred—and prodded by President Trump to deliver oil supply and help reduce prices—OPEC+ stepped into the breach to accelerate its long-planned return of voluntarily idled supply. This action cements the break into the new cost regime, forces immediate cuts to U.S. capex, and takes share from U.S. shale producers. Some private firms will not survive.

Today, the WTI price now on our screens (CL1 on Bloomberg) is not a low WTI price in the old price regime; it is a rangebound price in a new price regime born between April 2 and May 3 in 2025.

Our baseline forecast for the 2025 yearend WTI crude oil cash price is now $61.25. We estimate a 23% probability of a yearend price below $50 and a 17% chance of above $80. < IMO the situations with Russia and Iran will have a significant impact on where the WTI oil prices ends up in 2H 2025. I believe the price risk is to the upside.

By definition, each barrel of voluntarily idled capacity that OPEC+ activates will reduce the buffer of global spare oil production capacity, making the global market increasingly more vulnerable to the ever-present oil supply shocks (e.g., war, hurricanes, wildfires, accidents).

Moreover, each dollar trimmed off the WTI price forces further cuts to U.S. capex, making the global market increasingly more vulnerable to sweet-sour spread economics and the underlying natural depletion rates that are a fact of physics not fiscals.

As OPEC+ brings medium sour crudes to market, we expect the group’s leadership has concluded a sub $60 WTI price is undesirable, as it will only increase the probability of an unwanted light sweet oil price spike on the other side that will displease consumers and the man sitting in the White House.

[dan_s]

To add to the bullish developments, wildfire season in Alberta has started prompting production shutdowns, to date affecting more than 340,000 barrels daily. This is equal to 7% of the total, Reuters noted, but it has been enough to fuel a price rally—and imply that demand for oil is healthier than many like to argue.

Reuters’ Clyde Russell, in his latest column, noted that oil imports into Asia have been weaker so far this year than a year ago and suggested OPEC+’s latest production hike came at a bad time in terms of demand. Russell wondered if the OPEC+ members hiking production would “find buyers for the additional oil,” in light of Asian oil imports in May slipping lower from April, to an estimated 24.2 million barrels daily from 24.85 million barrels daily.

In light of the abovementioned geopolitical developments, chances are the answer to that question is “yes”—and that additional oil may fetch better prices, too. Because once again, oil market players were reminded that it’s not so important what this forecaster or another says about demand and how global supply exceeds it. It’s important what happens in the real, physical world, and in that world, demand for oil remains as robust as it has been since the end of the pandemic lockdowns, the gradual weakening of China’s appetite for crude notwithstanding.

“Demand is set to pick up as we move into the summer months, suggesting prices are likely to remain relatively well supported,” ING commodity analysts wrote in a new note today, after earlier this week Goldman Sachs somewhat grudgingly acknowledged seasonal oil demand patterns that point to equally stronger prices ahead.

“Relatively tight spot oil fundamentals, beats in hard global activity data, and seasonal summer support to oil demand suggest that the expected demand slowdown is unlikely to be sharp enough to stop raising production when deciding on August production levels on July 6th,” the bank said in a note Monday.

Indeed, not only is geopolitics making oil bears nervous, but summer driving season is advancing, and the shock of Trump’s tariff-first approach to trade policies is subsiding. Oil is currently quite affordable, which would stimulate demand, and its immediate supply outlook is uncertain, which often acts as fuel for prices.

By Irina Slav for Oilprice.com