COMMODITY HIGHLIGHTS

March 20, 2024Commodity Commentary5 Minute Read

Executive Summary

Oil prices strengthened for the second month as OPEC+ extended their supply curb deal until the end of Q2 2024.
The Saudis, who have the greatest spare capacity, are increasingly less likely to reverse supply cuts and flood the market with a backdrop of relatively more robust oil prices.
Rig counts have continued to rise, according to the latest data release from Baker Hughes.
US drillers have substantially increased well productivity, driving production to another record high.
US and non-OPEC production growth were the primary contributors to lower prices by YE 2023. Still, the right tail risks of higher oil prices in FY 2024 are supply disruptions related to drone attacks on Russian refineries.
Strong demand from Chinese household savings and growing Indian household incomes should bolster the demand for gold.
Positive IMF GDP growth projections for India strengthen the case further for investment demand for gold.
The $USD will weaken relative to a basket of global currencies as the Fed eases monetary policy, a tailwind for gold prices.
Central banks want to diversify reserves away from $ USD-denominated assets, further strengthening the bullish gold thesis.

Oil and Gas Management:

Kathy Robertson, RPL,CMM
Manager of Oil and Gas Property Operations
817.255.4955
kathy.robertson@plainscapital.com
Fort Worth

Oil and Gas Commentary

Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024. The gains have been considerable, with West Texas Intermediate adding about $7.00 per barrel over February.

Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices were to their liking, and if cuts are getting extended, then current prices are not yet to OPEC’s liking. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that prices will plunge when they release additional supply. Therefore, the chance of Saudi cuts being reversed anytime soon is slim.

The number of active oil and gas drilling rigs in the United States rose this week by 3 to 629, according to new data published by Baker Hughes on Friday, March 1. The Permian Basin saw a 1-rig gain after increasing by two the week before. The count in the Eagle Ford stayed the same.

U.S. drillers substantially increased well productivity, pushing total production to another record. Analysts are boldly assuming that the productivity gains will continue this year.

Diamondback Energy, Inc. and Endeavor Energy Resources, LP made big news last month. Diamondback acquired Endeavor for a $26 billion cash-and-stock deal that continues a rapid consolidation in the top U.S. Shale oilfield. The combined company will be the third-largest oil and gas producer in the Permian Basin of West Texas and Southeastern New Mexico, behind Exxon Mobil and Chevron.

Finally, the robust US and non-OPEC supply growth drove lower oil prices at YE 2023. A developing 2024 narrative is the risk of supply disruptions outside the Red Sea, specifically Russia –Ukrainian drones continue to target Russian refining facilities. Any meaningful disruption to Russian supply, a top 3 global producer, is a right-tail risk to energy prices.

Oil and Gas Key Callouts:

Oil prices strengthened for the second month as OPEC extended the supply curb deal.
It’s expected that the probability of a reverse in Saudi supply cuts is low.
The total rig count rose to 629, according to Baker Hughes.
US drillers continue to increase well productivity further increasing record production.

Commodity Highlights

Two of the largest gold markets –China and India—see strong demand for gold as households seek a store of value against deflation risks. Central bank purchases of gold will continue as they diversify away from the US dollar. Geopolitical risk can also factor into the premium attributed to gold prices.

The most crucial factor is the relationship of Gold’s price to the US dollar. As real rates come down, the dollar’s relative value should follow, as real rates drive the relative values of currencies. This, too, is supportive of gold and will likely spur demand in China and India. Households increased their gold bar and coin investments by 28% in 2023.

Chinese gold demand can be tempered by negative wealth effects from a fragile equity market and relatively high gold prices measured in RMB. These trends are expected to continue as deflationary pressures, especially in the Chinese economy, do not anticipate abating.

In India, demand for Gold is expected to increase as economic growth has accelerated. In the latest IMF economic growth outlook, Indian GDP is expected to be 6.5% next year, an upward revision to last year’s forecast. Despite gold prices setting new records last year, gold jewelry demand in India declined only 6% y/y, whereas bar bullion and coin demand grew by 7% y/y. Looking forward, it is expected that as Indian economic growth picks up next year, this will translate into higher household spending and higher gold demand.

Central bank buying of Gold continued to accelerate last year, with net purchase reaching 1,037 tonnes, ~45 tonnes short of the 2022 record. This pace is expected to continue, particularly among EM states looking to diversify US dollar exchange reserves. Geopolitical risk has a historical relationship with putting a firm bid under the price of gold. Finally, and most significantly, expanding fiscal deficits strongly correlate with gold prices. Households are looking for a way to protect against fiat debasement and use gold as a store of value to protect against financial repression policies.

In summary, physical demand for gold is expected to remain robust, with the expectation that the trend of flight to safety and central bank reserve diversification will continue. These factors should support the price of gold, although it is expected, given the recent breakneck price appreciation, prices should consolidate some here. Still, potentially move beyond $2,200/ oz this year.

Commodity Key Callouts:

Strong demand from Chinese and Indian households should continue to bolster demand.
Positive growth revisions to India’s GDP strengthen the case for income and investment demand.
If and when the Fed cuts rates, a weak $USD should ensue, creating an additional tailwind to gold prices.
Finally, central banking reserve diversification and structural deficits are statistically significant bullish factors for gold prices.

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*All economic release data referenced from public sources believed to be accurate

*The source of data for all charts/graphs included in this presentation is Bloomberg LP.

*Figures quoted represent monthly changes (m/m) and are seasonally adjusted