The past year was a banner year for the oil and gas sector as prices rallied to decade highs. Investing News published a list of things to look out for in the coming year.
A resurgence in demand following pandemic lockdowns converged with supply disruptions caused by sanctions on Russia, driving West Texas Intermediate and Brent crude to $120 per barrel during the first half of the year. Values began to trend lower in H2, leaving both crude types on course to end the year in the same price territory as they started.
Meanwhile, European natural gas supply faced hurdles as Russia’s invasion of Ukraine infused global markets and economies with uncertainty. By August, prices for the fuel used to heat homes had reached a 14 year high of $9.71 MMBtu.
Investing News quoted FocusEconomics claiming the war severely disrupted energy supply out of Russia, which last year accounted for more than 10 percent of world crude supply and 40 percent of Europe’s natural gas imports.
“Most of the volatility seen in oil prices this year was caused by the announcement of Russia’s invasion of Ukraine — with prices spiking around 30 percent by early March — and the later announcement of sanctions by western countries and their allies. With a major escalation of the war involving NATO unlikely, and most significant sanctions already announced, the war is less likely to cause prices to spike or plummet as sharply as in 2022,” FocusEconomics panelist Matthew Cunningham said.
Amid high inflation and rising interest rates, the global economic outlook has worsened and pushed energy prices lower. Prices for crude fell below $90 in November and have remained at that level since.
“It’s basically at a year-to-date low,” Mercenary Geologist Mickey Fulp said. “A lot of that has to do with lockdowns in China decreasing demand, and high gas prices have decreased demand in the US.”
“With the winter set to aggravate China’s COVID problems and Europe’s natural gas crisis, the global growth outlook remains depressed, but we do not see the global economy at imminent risk of sliding into recession in early 2023. The financial conditions drag is being cushioned by a fading of supply chain and commodity price shocks,” wrote Bruce Kasman, head of economic and policy research at JPMorgan.
It is worth noting that 2022’s high inflation and strict monetary policy have shrunk global GDP growth by almost half, from 6 percent in 2021 to 3.2 percent. That number is forecast to contract to 2.7 percent in 2023, representing the weakest growth period since 2001.
Oil and gas supply questions to persist
With sanctions on Russia — the third largest oil-producing nation — impeding output from that country, the world has looked to the Organization of the Petroleum Exporting Countries (OPEC) to ramp up production.
In November, OPEC production contracted by 310,000 barrels per day. The 11th month of the year also saw the oil cartel fail to meet its projected quota by as much as 1.81 million barrels per day. On the flip side LNG imports into Europe jumped, helping to bring the price of the heating fuel to US$5.28, its lowest point since March.
For oil, supply remains a concern. Not only will countries need to secure a steady supply to keep their economies running, but nations like the US will also need to replenish reserves they tapped into earlier this year.
In 2022, the US released 180 million barrels of crude from its Strategic Petroleum Reserve, raking in a total of US$4 billion. Currently, the reserve houses 378.62 million barrels, down from 598.92 million one year ago.
“They are not funding any oil and gas ventures, so companies cannot raise money and their production is flat,” Fulp said. “Production has been flat in the US for basically a year and a half now since we recovered from the pandemic, and it’s not going higher.”
According to the Mercenary Geologist, the US has an opportunity regarding LNG if it can find more efficient ways to transport it internationally.
Oil and gas companies expected to perform well
Even though institutional investors have moved away from oil and gas, the sector saw significant profits in 2022. The year’s strong performance has led to Fitch Ratings giving the sector a stable outlook score.
“Sector performance in 2023 will remain broadly in line with that in 2022 and significantly stronger than in the mid-cycle,” it states. “We expect average oil and gas prices to moderate in 2023, not least because of an economic slowdown, but the hydrocarbon markets will remain tight due to lower oil and in particular natural gas supplies from Russia and OPEC+’s cautious stance.”
The industry watchdog expects 75 percent of oil and gas companies to report positive free cash flow after dividends.
“[Oil and gas] companies across the globe will continue to report high earnings despite windfall taxes introduced by some countries. Inflation will bite but most companies have significantly reduced costs during the period of low oil prices, which will contribute to their cash flows,” Senior Director Dmitry Marinchenko said in a report.
Optimistic about the year ahead, the ratings group believes demand growth out of China will be a price catalyst. That said, the reintroduction of COVID-19 protocols could hinder demand out of the Asian nation.
Spare capacity could be impacted if OPEC+ remains cautious, adding tailwinds to values, as per Fitch. But the larger, longer-term energy transition could lead to slowing demand and price weakness.
Expect oil and gas price volatility in 2023
FocusEconomic panelists see production from OPEC largely stagnating in 2023, capped by the recent output quota cut. Russian production will fall due to tighter sanctions, while output in the US is set to grow, albeit at a limited rate because of recent weak drilling activity by shale producers.
As a result, prices are expected to see some volatility with crude prices overall to average around 7 percent lower in 2023 than they did in 2022. Also, uncertainty will keep prices at the highest levels in the past decade, holding in the $90 level.
To contact the author, email bojan.lepic@rigzone.com
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