In Q2 2023, the composite of energy commodities trading on U.S. futures exchanges, including NYMEX and Brent crude oil, RBOB gasoline, heating oil, natural gas, and Chicago ethanol swaps, edged 0.53% lower. However, the sector led the commodities asset class on the downside over the first half of 2023 with a 14.44% loss. While refining spreads fell in Q2, they reflected seasonal factors over the first six months of 2023. Coal for delivery in Rotterdam, the Netherlands, another fossil fuel, declined in Q2, adding to losses from Q1.
As we head into the second half of 2023, traditional energy commodities are at levels where they will likely find support. The worst-performing commodities during one period often become the best as prices drop to unsustainable levels on the downside.
Crude oil falls in Q1 and Q2
NYMEX WTI crude oil declined 6.65% in Q2 and 11.99% over the first six months of 2023.
The chart highlights the decline in one of the two petroleum benchmarks. Nearby NYMEX futures settled at $70.64 per barrel at the end of Q2.
Meanwhile, Brent crude oil futures, the pricing mechanism for two-thirds of the world’s petroleum, fell 6.25% in Q2 2023 and was 12.72% lower than the end of 2022 price on June 30, 2023.
Brent futures settled at $74.90 per barrel on June 30, 2023. Crude oil made lower highs and lower lows throughout the first half of this year.
Oil products and crack spreads reflect seasonal factors
While RBOB gasoline futures fell 5.08% in Q2, they were still 2.69% higher than the 2022 closing price. Gasoline futures slightly underperformed crude oil during the second quarter, leading to a 1.72% decline in the gasoline crack or refining spread. However, as the 2023 driving season began in Q2, the nearby gasoline crack spread was 52.75% higher than the 2022 closing price on June 30, 2023.
Heating oil futures declined 6.60% in Q2 and fell 24.72% over the first six months of this year. Heating oil is a proxy for other distillate fuels, including diesel and jet fuel. The heating oil refining spread dropped 5.99% in Q2 and was 44.79% lower over the first half of 2023.
The more significant decline in heating oil and six-month rise in gasoline reflects the seasonal strength in gasoline during the spring and summer as drivers put more mileage on automobiles when the weather improves.
Nearby gasoline and heating oil futures were at $2.54490 and $2.4476 per gallon wholesale, respectively, at the end of Q2.
Natural gas recovers
Natural gas is a wild and volatile energy commodity. In August 2022, the price exploded to over $10 per MMBtu, the highest price since 2008. In Q1, nearby natural gas futures fell below $2. While the NYMEX futures recovered and rose 26.26% in Q2 2023, they were still 37.47% lower than the price on December 30, 222 on June 30, 2023.
The continuous contract natural gas futures chart displays a significant rally in 2022 and a correction from August 2022 through April 2023. Natural gas prices found a bottom at just below the $2 level and were trading at $2.798 per MMBtu on June 30.
Coal and ethanol drop
Like oil and gas, coal is a fossil fuel. Coal futures for delivery in Rotterdam, the Netherlands, declined 12.77% in Q2 and was 35.43% lower than the 2022 close at the end of June 2023. Nearby coal futures settled at $123 per ton on June 30.
Ethanol is biofuel blended with gasoline in the U.S. In the U.S., ethanol is corn-based, while Brazil’s input is sugar. Nearby Chicago ethanol swaps fell 4.87% in Q2 and were down 1.39% over the first half of 2023, closing at $2.2975 per gallon wholesale on June 30.
The four reasons to expect higher fossil fuel prices in Q3 and beyond
At least four factors support traditional energy prices as we move into the second half of 2023:
- Even though the U.S. and Europe are encouraging alternative and renewable fuels and inhibiting the production and consumption of fossil fuels, oil, gas, and coal continue to power the world. India and China account for over one-third of the world’s population. Economic growth in emerging nations supports increasing fossil fuel demand as The Chinese and Indian governments do not participate in climate change initiatives to the same extent.
- OPEC+’s mission is the achieve the highest oil price that balances supply and demand fundamentals. The cartel has cut production in 2022 and 2023. Saudi Arabia needs an $80 Brent price to balance its domestic budget. Russia, the plus in OPEC, requires petroleum revenues to support the ongoing war in Ukraine and its domestic economy, considering onerous sanctions. The cartel will use its increased pricing power to keep oil prices as high as possible over the coming months and years. U.S. energy policy handed pricing power back to OPEC+.
- The Biden administration addressed the highest petroleum prices since 2008 in 2022 with unprecedented Strategic Petroleum Reserve sales. The U.S. SPR fell over 42% from over 600 million barrels in late 2021 to 347.2 million barrels as of June 30. The administration said it will repurchase crude oil for the SPY at between $67 and $72 per barrel. While prices dropped to the target range, the administration continued to sell, but the first purchase tender is for August 2023. Given the forty-year SPR low, the administration does not have significant barrels to sell if the price rises. Moreover, the U.S. will likely buy below $70 per barrel, supporting oil prices.
- China and other BRICS countries have begun pricing crude oil in non-dollar assets. De-dollarization in the oil market could weigh on the U.S. currency’s dominant role as the world’s reserve foreign exchange instrument and petroleum pricing mechanism, causing dollar-based prices to rise.
Meanwhile, the traditional energy sector was the worst-performing commodity market sector over the first half of 2023. The laggard often becomes a leader over the following periods, which could mean energy prices will make a comeback before the end of 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.
