In a January 4, 2023, Barchart article, I highlighted the price action in the energy sector in Q4 2022 and 2022. While ethanol, natural gas, and coal prices fell in Q4, Brent and WTI crude oil, gasoline, heating oil, and crack spreads increased. Percentage losses in natural gas sent the sector lower at the end of 2022. The energy sector fell 4.62% in the final quarter of 2022 but posted a 15.47% gain for the year.
In Q1 2023, gasoline and gasoline refining spreads were the upside leaders, with ethanol moving slightly higher. However, crude oil, heating oil, distillate crack spreads, natural gas, and Rotterdam coal prices moved to the downside. The sector fell 11.96% in Q1, making energy the worst-performing member of the commodities asset class.
At the end of the January 4 article, I wrote, “Expect lots of volatility in the oil, gas, coal, and biofuel markets over the coming weeks and months, and you will not be disappointed. The first move in 2023 was to the downside.” The bearish price action continued throughout the first three months of the year.
Crude oil falls in Q1
WTI and Brent crude oil futures posted 6.71% and 10.39% respective gains in 2022. In Q1, they fell 5.72% and 6.91% as rising interest rates and global economic weakness weighed on the energy commodity. Moreover, unprecedented U.S. sales from its Strategic Petroleum Reserve were a bearish factor for the energy commodity that powers the world.
The nearby NYMEX WTI futures chart shows the pattern of lower highs and lower lows following the March 2022 $130.50 per barrel fourteen-year high. Nearby NYMEX futures fell to $64.12 per barrel in March 2023 and settled at $75.67 on March 31, 2023.
Nearby ICE Brent futures followed the same path since March 2022 after rising to $139.50, the highest price since 2008. Brent crude oil closed Q1 at the $79.89 per barrel level.
As the charts show, prices were well above the $80 per barrel level on April 12, 2023, as the energy commodity spiked higher in Q2’s first trading session.
Oil products and crack spreads reflect seasonal factors
Gasoline and heating oil futures moved in opposite directions in Q1 as seasonal factors drove prices. At the end of the winter, gasoline demand for the upcoming peak driving season tends to rise, while heating oil and distillate demand is more economically sensitive. In 2022, gasoline futures rose 11.4%, and heating oil posted a 41.7% gain. In Q1 2023, gasoline futures moved 8.18% higher, while heating oil, the proxy for distillate fuels, fell 20.47%.
The chart highlights the seasonal rise in gasoline futures from December 31, 2022, through March 31, 2023. Nearby NYMEX gasoline futures settled at $2.6810 per gallon wholesale at the end of Q1 2023.
The chart highlights the bearish pattern in heating oil futures from the end of Q4 2022 through March 31, 2023. Nearby NYMEX heating oil futures settled at $2.6206 per gallon wholesale at the end of Q1 2023.
Crack spreads reflect the refining margin for processing a crude oil barrel into oil products. In Q1, the rise in gasoline and outperformance compared with crude oil pushed the gasoline crack spread 55.42% higher. Meanwhile, heating oil’s underperformance compared to petroleum prices caused the distillate refining spread to drop by 41.28%.
Seasonality continues to impact the refining margins in early Q2 as gasoline cracks were slightly higher than the Q1 closing level on April 12, and distillate cracks were lower.
Natural gas plunges
In August 2022, natural gas rose to its highest price since 2008, when it probed over the $10 per MMBtu level. The energy commodity turned south, and the price explosion became an implosion. In 2022, the nearby NYMEX natural gas futures price was 19.97% higher, but in Q1 2023, it plunged 50.48%. After peeking above $10 in August, the price fell and probed below $2 per MMBtu in March 2023.
The chart highlights the wild and volatile price action. With the 2022/2023 winter on the horizon in August 2023, European natural gas prices rose to record highs as supply concerns over Russian exports peaked. U.S. prices rose with the European natural gas markets as the demand for U.S. LNG soared. Meanwhile, a warm European winter caused prices to come down to earth, and U.S. stocks increased, putting additional pressure on the energy commodity.
Source: EIA
The chart shows natural gas inventories across the U.S. were at 1.83 trillion cubic feet on March 31, 2023, 31.9% above last year and 19.5% over the five-year average as of the end of Q1 2023. The withdrawal season is ending with natural gas supplies nearly 450 bcf over the level at the end of the 2022 peak demand season. Nearby NYMEX natural gas futures settled at $2.216 per MMBtu on March 31 and were lower at just over $2 on April 11.
Ethanol rose, while coal declined in Q1
Ethanol, biofuel blended with gasoline in the U.S., rose 3.65% in Q1 after a 2.64% rise in 2022.
The chart of nearby Chicago ethanol swaps shows the price closed Q1 at $2.4150 per gallon wholesale. On April 12, ethanol prices were slightly higher at the $2.4400 level. The chart shows ethanol remains elevated compared to the past years.
Coal for delivery in Rotterdam, the Netherlands, rose 62.27% in 2022 and fell 25.98% in Q1 2023.
The chart shows Rotterdam coal prices closed Q1 at $141 per ton and were slightly lower on April 11, remaining elevated compared to the pre-2021 level.
OPEC+ makes a statement in early Q3
Energy was the worst-performing sector of the commodities market in Q1 and the only sector with a double-digit percentage loss. However, the loser during one period often becomes a winner the next, and crude oil did not wait long before spiking higher in Q2.
On April 2, OPEC+ announced a surprise production cut of over one million barrels per day, pushing WTI and Brent prices above the $80 per barrel level. In March 2023, the U.S. administration had the opportunity to purchase oil for the Strategic Petroleum Reserve after selling an unprecedented level at an average of around $96 per barrel. The administration had told markets it planned to purchase petroleum at $70 and below, but it hesitated, which could be a tragic mistake. As of April 7, the U.S. SPR stood at 369.6 million barrels, the lowest since November 1983. In late March, the SPR fell despite the move below $70 per barrel to a $64.12 low.
In October 2022, the Biden Administration said it “intends to repurchase crude oil for the SPR when prices are at or below above $67 -$72 per barrel, adding to global demand when prices are around that range.” At over $80 per barrel in early Q2, the administration missed the opportunity, and OPEC+’s product cut could cause prices to soar as the U.S. cannot fight higher prices with further SPR sales. Moreover, as China emerges from its COVID-19 protocols, increasing energy demand could send prices appreciably higher.
When it comes to natural gas, the trend is always your best friend. The move to a fourteen-year high at over $10 last August gave way to a trend that threatens the June 2022 twenty-five-year low at $1.44 per MMBtu over the coming weeks and months. At the end of 2022, I warned that volatility in energy would continue, and I see no reason to change that opinion in early Q2 2023.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
