[ad_1]
Pull quote was provided by Investing News Network client Enterprise Group. This article is not paid-for content.
2022 was a banner year for the oil and gas sector as prices rallied to decade highs. A resurgence in demand following pandemic lockdowns and supply disruptions from sanctions against Russian fuel converged driving West Texas and Brent Crude to US$120 a barrel during H1.
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.
European natural gas supply faced its own hurdles as the Russian invasion of Ukraine infused global markets and economies with uncertainty. By August the price of the fuel used to heat homes reached a 14 year high of US$9.71 MMBtu.
According to the 2023 FocusEconomics outlook, the invasion severely disrupted energy supplies 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,” FocusEconomics panelist Matthew Cunningham told INN.
The economist went on to point out that the ongoing war shouldn’t have such a pronounced effect on energy prices moving forward.
“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,” Cunningham said.
Economic downturn
Amid high inflation and rising interest rates, the economic outlook has contracted globally and pushed energy prices lower. Per barrel prices for crude fell below US$90 in November and have remained there since.
WTI crude’s price performance year-to-date.
Chart via TradingEconomics.
“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 decreased demand in the US.”
Brent crude’s price performance year-to-date.
Chart via TradingEconomics.
The weakened economic conditions are expected to persist into the New Year, although some analysts believe a recession is avoidable.
“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,” wrote Bruce Kasman, head of economic and policy research at JP Morgan.
Natural gas’ price performance year-to-date.
Chart via TradingEconomics.
“The financial conditions drag is being cushioned by a fading of supply chain and commodity price shocks,” he wrote.
2022’s culmination of multi-decade-high inflation and strict monetary policy has resulted in global GDP shrinking by almost half, from 6 percent in 2021 to 3.2 percent. That number is forecasted to contract to 2.7 percent in 2023, representing the weakest growth period since 2001.
A muted economic performance is projected to keep energy prices from surging to fresh heights.
“Our panelists see energy prices easing throughout 2023 on mild global economic growth,” the FE report states. “However, they will remain elevated owing to constrained supply, amid OPEC+’s production cut and sanctions on Russian energy exports.”
Questions about supply
As sanctions against Russia — the third largest oil producer — impeded output from that country, the world looked to OPEC to ramp up production out of other oil-producing nations.
“The other factors we are watching include OPEC+ output, the potential lifting of sanctions on Iran and Venezuela, further oil reserve releases and global economic growth — with a focus on US Fed hikes — as well as China, following the recent relaxation of the country’s zero-COVID policy,” Cunningham said.
In November, production out of OPEC 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.
Despite concern over the OPEC shortfall, liquid natural gas imports into Europe jumped, helping to bring the price of the heating fuel to its lowest point since March of US$5.28 MMBtu.
Not only will countries need to secure a steady supply of oil to keep economies running, nations like the US will also need to replenish reserves they tapped into earlier this year.
For 2022, the US sold 180 million barrels of crude from its strategic crude oil reserve, for a total of US$4 billion. Currently, the reserve houses 378.62 million barrels, down from 598.92 million one year ago.
“The US was the swing producer the day that Trump left office, and had been for three years,” Fulp said. “And now we’re back to OPEC being the swing producer. And that’s not good. You know, OPEC now controls prices.”
He went on to explain that production in the US may contract over the next few years as big banks choose to no longer invest in the space.
“They are not funding any oil and gas ventures so companies cannot raise money and their production’s flat,” he 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 they can find more efficient ways to transport it to ships for international shipping.
Oil and gas companies perform well
Despite institutional investors moving away from oil and gas, the sector saw significant profits in 2022. Supply disruption from the war and the resurgence in demand kept prices above US$80 a barrel for the majority of the year.
2022’s strong performance 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,” the 2023 forecast report states. “We expect average oil and gas (O&G) 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 (FCF) after dividends.
“O&G 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,” Fitch’s senior director Dmitry Marinchenko said.
Optimistic about the year ahead, the ratings group pointed to demand growth out of China as a price catalyst. On the other hand, a reintroduction of COVID protocols could also hinder demand out of China.
OPEC+ remaining cautious could impact spare capacity, adding tailwinds to values. However, the larger, longer-term energy transition could lead to slowing demand and price weakness.
Prices could remain high
Looking ahead, FocusEconomic panelists see production from OPEC countries largely stagnating in 2023, capped by the recent cut to output quotas.
“Moreover, Iranian oil output will stay depressed due to a slim path to a nuclear deal. However, Venezuela oil output should rise thanks to the US government’s recent decision to allow Chevron to resume production in the country,” Cunningham said.
He expects Russian production to fall due to tighter sanctions, while production in the United States is set to grow, but the expansion will be limited by recent weak drilling activity by US shale producers.
As a result, prices are expected to see some volatility.
“We expect crude prices on the whole to average around 7 percent lower in 2023 than they did in 2022,” he added. “A bearish demand outlook will drag on prices, with global economic growth set to slow as the Fed and other major central banks continue with monetary tightening.”
Cunningham went on to point out that all the uncertainty will keep prices at the highest levels in the past decade, holding in the US$90 a barrel level.
“Increasing disruption to Russian exports and OPEC+’s recent cut to output quotas will limit supply, with the market projected to be in a slight deficit next year,” Cunningham said. “Moreover, there are upside risks to prices posed by better-than-expected growth in China or a sharper-than-expected fall in supply.”
Don’t forget to follow us@INN_Resource for real-time updates!
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.
From Your Site Articles
Related Articles Around the Web
window.REBELMOUSE_LOWEST_TASKS_QUEUE.push(function(){
if (!REBELMOUSE_BOOTSTRAP_DATA.isUserLoggedIn) {
const searchButton = document.querySelector(".js-search-submit"); if (searchButton) { searchButton.addEventListener("click", function(e) { var input = e.currentTarget.closest(".search-widget").querySelector("input"); var query = input && input.value; var isEmpty = !query;
if(isEmpty) { e.preventDefault(); input.style.display = "inline-block"; input.focus(); } }); }
}
});
window.REBELMOUSE_LOWEST_TASKS_QUEUE.push(function(){
var scrollableElement = document.body; //document.getElementById('scrollableElement');
scrollableElement.addEventListener('wheel', checkScrollDirection);
function checkScrollDirection(event) { if (checkScrollDirectionIsUp(event)) { //console.log('UP'); document.body.classList.remove('scroll__down'); } else { //console.log('Down'); document.body.classList.add('scroll__down'); } }
function checkScrollDirectionIsUp(event) {
if (event.wheelDelta) {
return event.wheelDelta > 0;
}
return event.deltaY < 0;
}
});
window.REBELMOUSE_LOWEST_TASKS_QUEUE.push(function(){
!function(f,b,e,v,n,t,s){if(f.fbq)return;n=f.fbq=function(){n.callMethod?
n.callMethod.apply(n,arguments):n.queue.push(arguments)};
if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version='2.0';
n.queue=[];t=b.createElement(e);t.async=!0;
t.src=v;s=b.getElementsByTagName(e)[0];
s.parentNode.insertBefore(t,s)}(window,document,'script','https://connect.facebook.net/en_US/fbevents.js');
fbq('init', '2388824518086528');
});
[ad_2]
Source link