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Written by: Pulkit Sabharwal | AGF
Oil and Water
It has been a volatile year for global oil markets, with Brent crude prices collapsing from near US$75 per barrel at the beginning of the year to less than US$60 per barrel during the month of April. This was driven by two events: first, the potential of a global trade war, which resulted in recession fears and expectations for slowing oil demand; and second, The Organization of the Petroleum Exporting Countries+ (OPEC+)’s decision to increase supply.
That said, crude prices did recover from the initial collapse, partly because “off ramps” to the threat of tariffs” emerged, but also because of the realization that shale and other short cycle production starts declining if oil prices drop to low.
More recently, we have seen geopolitics enter the oil dynamics fore again with Israel choosing to strike nuclear facilities and military sites in Iran, along with certain energy-related targets such as an oil refinery in Northern Iran. While it is important to note that Israel has so far been careful to not target energy export facilities, the increase in hostilities no doubt increases the risk of supply disruption in the area.
The Strait of Hormuz, in particular, is top of mind for oil markets as it accounts for roughly 20% of the global oil supply trade. Given the importance of the seaway to all countries in the region – and significant U.S. naval presence there – it is unlikely that the Strait will be completely shut. But that by itself does not rule out some level of supply disruption to the oil trade in the region, resulting in the recent spike in crude prices.
Gassing Up
withstanding – the global natural gas market is being bolstered by some significant tailwinds. This includes North American gas export capacity via Liquid Natural Gas (LNG), which is set to more than double from 2025 to 2030.
Moreover, natural gas is benefiting from advancements in Artificial Intelligence (AI) and the subsequent need for more datacentres and greater power generation. This catalyst is further aided by the significant increase in coal power plant retirements.
This “demand pull” is likely not going to be fully met by existing supply in the U.S. and Canada given that the lowest cost basins are either too far from the LNG corridor/power markets or are constrained by pipeline capacity. As a result, there is an emerging need for higher prices to incentivize higher cost areas such as the Haynesville Shale Basin in the U.S. to increase production.
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