By Avi Salzman
Dec. 28, 2023
Natasha Kaneva, the head of global commodities strategy at J.P. Morgan, correctly predicted the decline in oil demand growth this winter that caused the commodity price to drop sharply. Prices could rebound in 2024 as demand rises again and the Organization of the Petroleum Exporting Countries holds back supply. But Kaneva thinks it is worth peering a little deeper into the well.
Photograph by Jack Sorokin
The energy market’s biggest players are at a crossroads. After posting record earnings in 2022 and seeing their stocks soar, most oil companies trailed the market by double digits in 2023.
OPEC suddenly has less sway over prices. In 2024, OPEC will face a particularly tricky decision about whether to continue limiting its own supply growth to keep prices high. The cartel is ceding market share to competitors outside the alliance, which have continued to boost production, and leaving itself with few options should oil prices fall again.
What’s more, the oil market is on the verge of a structural change that every energy investor needs to watch closely. Gasoline demand peaked in 2019 in the United States, and will almost certainly keep falling. The same kind of decline is happening elsewhere, too. In fact, 2024 will likely be the last year of global gasoline demand growth before a long, slow decline, according to Kaneva.
Barron’s spoke with Kaneva in early December about her outlook for oil, natural gas, and gold. An edited version of the conversation follows.
Natasha Kaneva: No. Endgame was the title of our annual outlook. It’s about OPEC, which has been put in a position whereby it has to continue being reactionary and cutting production to balance the markets. And the question is: What is the endgame? What is the exit strategy?
OPEC does seem to be in a complicated position. It keeps cutting supply, yet prices haven’t responded. What does it do next?
Currently we’re sitting at record oil demand levels, and OPEC is still carrying over four million barrels per day of spare capacity, with a significant amount of its cuts already extended through December 2024. Right now Saudi Arabia is producing nine million barrels per day. In 2020, at the peak of Covid, the average production from the country for the year was 9.2 million barrels per day. So today, they are producing below what they produced at the peak of Covid. It is becoming more and more difficult to make an argument why their production has to continue to be cut when demand is that high.
We think it makes sense to add supply instead of cutting supply. In this case, you have to be ready to accept a lower price range. Hence, that’s what we’re saying: between roughly $70 and $90 a barrel. That’s the price range we can derive from our models. We believe demand will be good enough next year to absorb additional supply. Our $83 price forecast assumes the Saudis will bring some production back and Russia will bring some capacity back, as well.
Bringing back production would allow OPEC to cut again if demand weakens?
Yes. The biggest conundrum is 2025. What OPEC does in 2024 will have a big impact on 2025. Demand will be great in 2024. That isn’t the view we have for 2025.
Why not?
GDP [gross domestic product] will be driving [oil demand], but you have to subtract decarbonization and electrification of the fleet. 2025 is the first year when we’ll actually see the decarbonization policies put in place more than a decade ago showing up in the data on an annualized basis. We have global gasoline demand contracting in year-over-year terms, although we don’t assume recession, not in 2024 or in 2025. The [electrification] numbers really start showing up at that time.
Today 4% of the U.S. fleet is already some type of electric. By 2025, we believe this number will be close to 7%. In Europe about 7% of the fleet is already some type of electric. This number will be 10% in ’25. Nine percent of the Chinese fleet is electric this year; by 2025 it will be closer to 16%. Cumulatively you’ll end up with contracting gasoline demand. Between now and 2030, we estimate global gasoline demand will decline by about one million barrels a day.
When will total global oil demand peak?
There is no peak in sight. We only modeled through 2030, so just to be fair, maybe it will peak in 2031 and we just didn’t model it.
If gasoline use will be declining, what will drive the growth in oil demand after 2024? Petrochemicals? Things like plastics?
Yes, and not just plastics. It is the invisible demand. A lot of people don’t realize how widespread the use of oil and gas is. Nylon, Lycra—all of that is petrochemical.
Oil supply growth outside of OPEC was one of the big stories of 2023. Supply grew a lot in the U.S. and a few other countries, such as Brazil and Iran. Will it keep growing in 2024?
We have non-OPEC supply growing at about 1.7 million barrels per day, with the U.S. accounting for 700,000 of that. Canada would have to start normalizing [production]. Hopefully, the weather conditions will be different for them in 2024 than this year [when wildfires caused production to stall]. There is a lot of growth we’re expecting from there. Brazil oil production is ramping up. Guyana is ramping up.
U.S. oil production rose to record highs recently of 13.2 million barrels a day. Does growth start to peter out soon? Shale fields are becoming less productive, right?
We don’t see the peak of U.S. oil supply. What is going to peak is the growth rate. That’s where you’re correct. Yes, we’ll have 1.5 million barrels per day of growth this year. Next year, it would be half that rate, about 700,000. Similarly in 2025, we have about 700,000 barrels of growth. In general, between 2026 and 2030, a sustainable rate of growth is about 200,000 barrels. We don’t see U.S. supply declining, unless there is a recession and prices are trading below $50.
Brent crude has lately been trading in the mid-$70s. Do you expect a smooth pathway higher in 2024?
We have a price forecast of $83 for 2024, but it will trade in a range—so it isn’t a neutral view, not at all. There will be a lot of opportunities. You have to be tactical, nimble. Most likely we’ll see the peak again in September of 2024. You have to look at the valuation and say, OK, this is a very low price, it makes sense to buy, but after that, not be greedy, and get out at the right time.
What is your outlook for natural gas, which fell a lot in 2023? In 2024, multiple liquefied natural gas [LNG] export facilities are set to open in the U.S., and some analysts expect those openings to cause export demand to ramp up and prices to rise.
The view of our analyst, Shikha Chaturvedi, is that there are two narratives. In the first half of the year prices should still be weak, with a significant amount of supply coming onstream. But starting from the third or fourth quarter of 2024, all that LNG capacity will be ramping up and demand will start overwhelming supply. That’s when we see the price environment strengthening significantly. So the price target at the end of next year is $4 per million British thermal units. It’s a bullish price outlook, for sure.
And you’re bullish on gold, right?
Since 2017, we have made only three calls on gold. In November 2017 we said, Buy gold. In July 2020 we said, Get out of that trade. And in November 2022, we recommended buying gold again. Gold and precious metals is the only commodity sector that had a positive return in 2023. It is up about 9%; everything else is down, so that was a great call. For 2024, again, this is the only long strategic call that we’re maintaining. It is for gold and silver. The target is $2,300 an ounce for gold, and about $30 for silver.
What is behind your bullish stance?
The main price driver for gold and silver—silver just reacts to what gold does—is the 10-year [Treasury note’s] real yield. It is the nominal yield minus inflation expectations. As long as the Federal Reserve doesn’t hike interest rates next year, the bullish gold and silver call should work out. When the Fed cutting cycle starts, whether in the second half of 2024 or the first half of 2025, that’s when we expect the real 10-year yield to start declining from the current, high levels. That should boost performance for those markets.
You have some other interesting calls. What is something that could surprise investors in 2024?
It is the election cycle. There will be 77 elections. Fifty percent of the world’s population will go to the polls in 2024. Some of these elections aren’t getting much attention. We have elections in Taiwan in January, and Indian elections in April and May, which could make a difference for some of the markets.
But the U.S. election is capturing the most attention. Why is it important for the oil market? Because the U.S. election is linked to the election in Venezuela. We believe there will be a lot of volatility around those events. There will be a lot of opportunities.
President Biden has been more willing to negotiate with the Venezuelan government than past U.S. administrations. Venezuela has been increasing oil production as sanctions are lifted. If there is a Venezuelan election in 2024 and a Biden victory, does that mean it is more likely there will be more oil supply in the future?
Correct. There was a temporary relaxation of sanctions on Venezuela. It could be extended, but before engaging, producers would want to see the outcome of the U.S. elections.
Would a Trump victory be seen as bullish or bearish for oil prices?
As you know, the Trump administration reinstated sanctions on Iran in 2018. There was an impact on Venezuelan production, as well. [It fell.] The current stance from the U.S. administration could get reversed under Trump. At the same time, I believe there will be no impact on U.S. supply, because U.S. supply is price-driven and producers are still being disciplined about how much capital they are deploying. I don’t think a change in the administration would change that.
Thank you, Natasha.
Write to Avi Salzman at avi.salzman@barrons.com
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