Energy: Will the 2023 Laggard be a Leader in 2024?

While green energy initiatives support alternative and renewable fuel sources and inhibit fossil fuels, crude oil, oil products, natural gas, and coal continue to power the world in early 2024. The energy sector of the commodities market, including oil, gasoline, heating oil, natural gas, and ethanol futures, fell 19.26% in Q4, while coal prices were 15.13% lower. In 2023, coal declined over 43%, while the traditional energy sector posted a 21.85% loss. 

As we move into 2024, energy prices have fallen to levels that offer value, considering the geopolitical landscape. Meanwhile, U.S. energy production and consumption will be a leading topic during the 2024 race for the White House. The opposition favors energy independence via drilling and fracking for fossil fuels, while the current administration is committed to a greener path, addressing climate change. 

Crude oil falls in 2023

ICE Brent and NYMEX WTI crude oil futures declined by 10.73% and 10.18%, respectively, in 2023. While the energy commodity posted double-digit declines, it was the leader of the energy sector as oil products, natural gas, Rotterdam coal, and ethanol losses eclipsed the losses in the petroleum futures arena. 

The monthly chart highlights the loss in NYMEX WTI futures, which closed 2023 at $71.65 per barrel and were slightly higher at the $73.12 level in mid-January 2024. 

The monthly Brent crude oil futures chart illustrates the 2023 decline, closing the year at $77.08 per barrel. Nearby Brent futures were slightly higher at the $78.44 level on January 12.  

Oil products drop more than crude in 2023

Oil products, including NYMEX gasoline and NYMEX heating oil futures, suffered more substantial 2023 declines than crude oil. The heating oil futures are a proxy for distillate products, including jet and diesel fuels. 

Gasoline fell 15.01% in 2023 while heating oil futures dropped 23.25% for the year that ended on December 29, 2023. 

The monthly RBOB gasoline futures chart shows the price settled at $2.1063 per gallon wholesale at the end of December 2023. The price was a bit higher at $2.1285 per gallon level on January 12. 

Heating oil futures were at the $2.5289 per gallon level at the end of 2023 and were higher at $2.6884 on January 12. 

Gasoline and heating oil are seasonal fuels, with gasoline reaching lows during winter and heating oil demand increasing when the temperatures drop. 

An ugly year for natural gas

Natural gas was the worst-performing traditional energy commodity of 2023. Nearby NYMEX natural gas futures plunged 43.82% in the year ending on December 29, 2023. 

The monthly chart of nearby NYMEX natural gas futures shows the decline from the August 2022 high of over $10 per MMBtu to $2.514 at the end of 2023. 

Natural gas tends to reach seasonal highs in winter, and the price rallied in early 2024 to nearly $3.40 per MMBtu, with the nearby February futures around $3.26 on January 12. 

Ethanol and coal prices plunge

U.S. ethanol is a byproduct of corn as the U.S. leads the world in corn production. U.S. gasoline is a gasoline, ethanol blend. In 2023, Chicago ethanol swaps fell 28.11% on weak gasoline and corn prices. Corn futures dropped 30.55% in 2023. 

The monthly chart illustrates the decline in biofuel in 2023. Nearby futures closed last year at the $1.6750 per gallon level and were lower at $1.6125 on January 12. 

Coal for delivery in Rotterdam, the Netherlands, closed 2023 at $108.30 per ton, down 43.15% for the year, and second only to natural gas on the downside. 

Rotterdam coal for February delivery was lower at the $103.55 per ton level on January 12. 

2024: The prospects for a recovery year

The worst-performing sector of the commodities asset class for one year tends to recover during the next year. The following factors favor energy commodities in 2024:

• Seasonality: Gasoline is the most ubiquitous oil product and tends to fall during the coldest months. As the 2024 driving season approaches over the coming months, gasoline demand will rise, which will likely push crude oil and oil product prices higher.
• Price levels: Traditional energy prices have declined to levels near critical technical support levels. After trading to multi-year highs in oil and U.S. natural gas and all-time highs in gasoline, heating oil, Rotterdam coal, and ethanol in 2021 and 2022, the corrections could find support, stabilize, and move higher during this year.
• The U.S. SPR: The U.S. administration’s target to replenish its Strategic Petroleum Reserve is $67-$72 per barrel. The SPR fell from over 600 million barrels in late 2021 to 355 million barrels as of January 8. The buying will likely provide support for the energy commodity.
• Wars: Wars in Ukraine and the Middle East could cause traditional energy prices to rise as they interfere with critical logistical routes. Moreover, Russia is OPEC+’s most influential non-member, cooperating with production quotas. OPEC’s goal is the highest oil price possible, and Russia has used its commodity production as an economic weapon against “unfriendly” countries supporting Ukraine. Meanwhile, logistical routes through the Persian Gulf and critical chokepoints have become treacherous, threatening the movement of crude oil from producing countries to worldwide consumers. The wars are fundamentally bullish for crude oil.
• Interest Rates: Stabile to lower U.S. interest rates is bearish for the U.S. dollar’s value and is bullish for commodity prices. Moreover, the potential for a BRICS currency challenging the dollar’s reserve currency could lift oil prices as the U.S. currency’s value declines. 
• The potential for economic recovery in China: China is the world’s second-leading economy, with a population of over 1.4 billion. China and India consume significant fossil fuels, accounting for around one-third of the world’s population. Economic growth in China and India could lift crude oil, oil products, gas, and coal demand and prices in 2024. 

Time will tell if the commodity asset class’s energy sector moves from laggard in 2023 to leader in 2024. Prices have dropped to attractive levels, with room for upside recoveries over the coming months.

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