Uncertainty versus clarity: oil & gas in 2022
As the world goes into 2022 amid the spread of a new strain of COVID, there are significant uncertainties for hydrocarbons. The lack of clarity on how dangerous this new strain complicates any forecasting exercises, as oil demand in 2022 will ultimately depend on the extent of lockdowns and other cautionary measures. OPEC+ has so far shown a reluctance to increase oil supply beyond the schedule agreed on in the summer. This is despite calls from the US and oil-importing countries for OPEC to lower oil prices. It is our view that OPEC+ will continue to effectively help the market, making sure there is no excess supply. At the moment, the group’s production is set to reach reference levels in September 2022. In our view, should there be a drop in demand, OPEC+ will be willing to amend their current plans.
The USA and its shale oil industry have been regarded as the swing oil producer of the past decade. However, due to high production costs and disruption they took the greatest hit from COVID-19 in 2020, as year-end 2020 oil production there went down 14% YoY to 11.0mn b/d. It has now bounced back to 11.6mn b/d (+5% YoY). However, we believe that any further recovery will be rather slow. Public US shale companies appear to be in no hurry to ramp up drilling capex significantly despite the complete recovery of oil prices, judging by the general tone of the management’s remarks at the latest earnings calls. The focus of American producers overall is on shareholder returns and reducing leverage. Public E&Ps produce around 70% of oil in the US, making them a significant factor in US total production. We note that back in 2015-2018 public US oils spent some USD 20/boe of capital expenditures. In those years the starting wellflow of an average new well increased 22% per year on average. In 2020, capex fell 46% YoY to just USD 9/boe. Coincidentally, the wellflow growth in 2021 dropped to 5%.
Summing up, in our view, the outlook for demand is uncertain, but on the production side we have more clarity: the US production will grow slowly and OPEC+ will continue to make sure there is no excess supply. The current futures curve assumes USD 74/bbl average Brent price in 2022, above 2019 levels, so evidently, the market also admits the persistence of OPEC+ quotas.
Gas will see more volatility in 2022, we think. TTF near-term prices stand at USD 33.82/mmbtu as of the end of December. Such elevated prices are driven by the low level of gas in European storages (67% of capacity or some 60bcm) and fears that this will not be enough to last through the winter season. The problem seems to be that current prices are stifling for consumers, preventing actual spot sales from happening. Lifting of gas from storages is preferable, as gas was injected when it cost cheaper. This adds to faster depletion of storages, creating a vicious circle. Gazprom, Europe’s key gas importer, has continually stated that it fulfills all of its contracts but its European export deliveries fell some 4bcm YoY in November, as gas hub sales dried up, although for the FY21 the company’s export deliveries to add some 2% YoY. The company is producing at its peak capacity, but the rate at which it is sending gas to its European storages is insufficient to tip the balance. Another factor is that Asian gas prices are at USD 38.80/mmbtu, above European ones, creating competition with Asia for LNG.
In the end, Europe’s ability to get through winter smoothly will depend on weather and other demand factors, such as the availability of wind generation. 2021 was marked by several occasions of still weather, which caused spikes in fossil fuel demand. Additional gas demand came from the energy transition. These factors – variability of renewable generation and demand for gas as a relatively cleaner fuel – together with the need to replenish storages during the injection season – will remain in play throughout 2022, so we expect high gas demand and a greater “normalized” gas price.
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