Where are oil and gas headed? Given that energy is at the centre of the current surging inflation, this is one of the most important issues facing the investment community.
Citigroup is arguing that “the world has abundant oil supply at $50-60/bbl breakevens”, which implies the current high prices may weaken, at least when looking at the supply side:
“Our equity research colleagues’ analysis of over 300 projects across different geographies from shale, deep- water and conventional projects continues to point to a long, flat marginal supply curve to 2026, with significant supply opportunities at $50-60/bbl. This is behind the broad-based supply growth already happening now.
“Non-OPEC+ supply growth continues apace, including US supply. And then there are sizeable SPR releases. Iran sanctions relief remains a lumpy addition to the market in the future, but has been beset by continued delayed. In 2022, Brazil may grow by 0.2-m b/d, Canada may grow by 0.3-m b/d. Guyana may grow by 0.2-m b/d, and could reach well over 1-m b/d this decade. Mexican production is recovering too, growing 0.1-m b/d. Argentina, Colombia, Norway are also on track to grow.”
The situation is more difficult with gas, however. Citi says it is hard for Europe to replace 0.8-m b/d of Russian gasoil imports:
“High global natural gas prices should decline, as the risk premium that the market has embedded and expected ?gradually give way, with prices coming closer to fundamentals. However, uncertainty remains extremely high. ?
“In Asia and Europe, the uncertainty over fundamentals and the unclear price-setting mechanism at unprecedentedly high prices have meant that market expectations of prices tended to be quite high. However, the reality has been that Europe is getting more LNG, China is importing less LNG and coal, gas inventory in Europe has climbed quickly, and a number of European buyers opt to keep buying Russian pipeline natural gas.”
Citi makes some forecasts about gas prices (bullish equals higher price):
- Our bullish case (15% likelihood) assumes a more wide-spread ban on Russian pipeline gas exports, due to sanctions or Russia cutting natural gas exports or pipelines damaged by military actions. The tight global coal and LNG markets would keep energy prices higher for longer. ?
- Our super bullish case (10% likelihood) depicts a scenario where the world enters into another cold war, with all Russian energy exports restricted. ?
- Our bearish case (10% likelihood) sees the crisis de-escalating and Gazprom ramping up pipeline natural gas exports. Russia might look to prevent a further loss of market share, while remaining European buyers of Russian pipeline gas look to fill its storage even more. Nonetheless, a global recession might also happen, thereby weakening global demand growth ?
- Our base case would have a 65% likelihood of unfolding. Fundamentals point to various supply and demand factors converging to make more LNG and coal available for Europe. But the risk is that tit-for-tat measures and countermeasures between Europe and Russia, pushed by politics, could paint both sides into a corner. ?
The scenarios for Asia and Europe, which vary greatly:
"At first glance, Europe has few options to move away from Russian natural gas within this year. Europe could get additional domestic production and pipeline exports from existing producers, but the volume would match only ~5% of Russian pipeline natural gas exports.”
What this may be pointing to is a more sustained problem with gas than oil, although the geopolitical uncertainty makes the situation highly unpredictable.
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