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Wednesday, November 29, 2023

Oil and Gas Outlook 2022: Uncertainty and Risk to Drive Prices

The oil and gas sector recovered much of 2020’s losses in 2021 as concern over the energy crisis and its effects drove WTI crude oil prices to a seven year high of US$83.76 per barrel (bbl) in October.

Natural gas also rallied to highs unseen since 2014 over the first 10 months of 2021, adding 142 percent to its value from January to October. Broad volatility brought on by production challenges supported the oil and gas spaces for the majority of the year. However, consolidation late in the fourth quarter weighed on both markets, eroding some of the gains made in the 10 previous months.

By the end of the year, WTI crude had climbed 61 percent from its 2021 start, while Brent crude was up 43 percent and natural gas added 40 percent.

Oil and gas trends 2021: Supply and demand imbalance

After 2020 saw demand briefly decline by as much as 30 million bbl/day and prices sink to a 21 year low, 2021 proved to be about recovery as prices rebounded.

This was most evident late in Q3 and early Q4 when prices touched the aforementioned 7 year highs.

As Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, explained, the recovery was led by an effort to recoup demand but was also largely facilitated by a mounting supply problem.

“I believe we’re in a multi-year bull market for oil,” Nuttall told INN. “ What we saw throughout 2021 continuing into 2022 is the lack of significant production growth from all over the world.”

Watch Nuttall delve into factors impacting the oil sector.

Nuttall added that the period of “hyper-growth” that was exhibited in the US shale sector over the last eight years is ending and additional OPEC production in 2021 was little to non-existent, signaling a “massively bullish event.”

Additionally, as noted by the World Bank’s Commodity Markets Outlook, Hurricane Ida and OPEC’s decision to keep production at current levels added tailwinds to the sector.

“Some oil-importing countries had called for larger increases, as the group continues to hold significant amounts of production capacity off the market,” the report reads. “Oil prices have also been supported by higher natural gas prices as oil is becoming more competitive as a substitute in heating and electricity generation.”

For Dmitry Marinchenko, senior director at Fitch Ratings, this measured approach gave prices the opportunity to grow.

2021 WTI Crude oil performance

“OPEC+‘s coordinated actions and improved demand have resulted in oil prices recovering from around US$50/bbl early in the year to US$70+/bbl,” he said. “The average price of around US$70/bbl exceeded expectations of most market participants.”

The senior director also referenced the 2021 natural gas market as “a perfect storm” of activity that sent prices 142 percent higher between January and October, from US$2.53 MMBtu to US$6.13 MMBtu.

2021 natural gas performance

“Everything went wrong — from cold 2019/20 winter and warm summer in the Northern Hemisphere, to increased demand in China and reduced supplies from Russia,” Marinchenko said. “As a result, prices soared to unprecedented levels and remain unsustainably high.”

Oil and gas outlook 2022: Geopolitics infusing risk into energy sector

2022 could be a pivotal year in the natural gas sector as Russia increases its military presence near Ukraine, provoking an international response. Russia is one of the largest producers of natural gas, supplying it and petroleum products to Europe and the US.

As the World Bank report notes, global natural gas inventories are currently very low, especially in Europe, in comparison to other years, making the geopolitical tensions more impactful.

“Severe sanctions against Russia are unlikely given its significant share of the global oil and European natural gas market, but cannot be completely ruled out if political tensions intensify,” Marinchenko said.

Even if global tensions are cooled, bureaucratic red tape could further delay the commissioning of Nord Stream 2, a 1,230 kilometer pipeline that will double the capacity of the current undersea route (Nord Stream) from Russia’s gas fields into Europe.

“Continued delays with Nord Stream 2 could prevent Russia from meaningfully increasing exports to Europe — even though Russia could technically increase deliveries through the Ukrainian route — and result in natural gas prices in Europe remaining high,” Marinchenko added.

Nord Stream 2 could also be an area of contention amid the rising tensions between Russia and the US. The potential outcomes were outlined in S&P Global’s January 25 market update.

“Because Europe depends on Russia for the majority of its crude oil, natural gas, and solid fossil fuel supplies, the Russia-Ukraine tensions have stirred anxiety within Europe over potential outcomes — if financial sanctions are imposed on Russia or Nord Stream 2 or if Russia slashes Europe’s energy supplies or cuts capacity through Ukraine,” the report highlighted. “Some market participants see Germany’s strategic energy partnership with Russia over the Nord Stream 2 pipeline as a conflict of interest in diplomatic dealings involving Ukraine.”

Oil and gas outlook 2022: Prices to trend higher

According to the International Energy Agency (IEA), global oil stores were reduced by 600 million barrels in 2021, a 200 million discrepancy from the forecasted tally. The 200-million-barrel difference could lead to a tighter market in 2022.

For Nuttall, this only strengthens his belief in the current market.

“The bullish thesis revolves around demand growth for at least the next 10-15 years,” he said. “It means the world is hurtling into an oil supply crisis and the oil price will have to go high enough in order to kill discretionary demand, and so the question you’ve probably asked is well ‘what oil price is that?’ … It would be an all-time high oil price … about US$140- US$150 per barrel if not higher.”

Veteran investor and speculator Rick Rule also sees investment potential in the 2022 oil and gas market.

“I think that yield oriented investors, not speculators, but yield oriented investors will be drawn increasingly to the oil and gas business,” Rule told INN in late December.

Listen to Rick Rule discuss where the resource market may go in 2022.

“The circumstances are in place that I think continue to guarantee higher prices for oil because the oil industry as a whole is deferring sustaining capital and new project investments, which continues to impair their ability to produce oil, which reduces supply,” Rule said.

Oil could also see an uptick in demand as a it becomes increasingly used as substitution for natural gas in heating and electricity generation.

The World Bank expects oil prices to average US$74 per barrel in 2022, as demand continues to recover and reach pre-pandemic levels during H2.

On the other hand, the World Bank anticipates natural gas prices to steadily decline in 2022 into 2023. The decrease will likely be the result of shrinking demand growth outside of Asia mixed with production and export increases.

“More broadly, the events of (2021) have highlighted how changing weather patterns due to climate change are a growing risk to energy markets, affecting both demand and supply,’ the October report noted. “From an energy transition perspective, concerns about the intermittent nature of renewable energy highlight the need for reliable baseload and backup electricity generation.”

Marinchenko and Fitch Ratings also see oil prices steadying in the US$70 range.

“We expect average oil prices remaining broadly stable year-on-year at around US$70/bbl,” the senior director said. “This is based on our expectation that OPEC+ will continue to actively manage supply to avoid large surpluses or deficits in the market.”

In terms of gas, prices are anticipated to come down significantly.

“In Europe, we assume average natural gas prices to subside from around US$16 per (one thousand cubic feet) mcf to US$8/mcf,” Marinchenko added. “However, this assumes that Russia will continue to operate as the ‘last resort’ marginal supplier (the role it played in the past).”

He also pointed out that geopolitical tensions and delays with Nord Stream 2 could result in natural gas prices remaining elevated for longer.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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