As we head into the new year, the energy picture is currently looking more stable with market fundamentals supporting continued price strength. With vaccinations helping to curb the worst impacts of COVID-19, and despite the surge of its Omicron variant, there appears to be some demand stability moving forward as economies have restarted and appear poised for growth. Globally, there is an increasing energy supply shortage that continues to inflate energy costs as the enthusiastic push towards decarbonization starts to conflict with the reality of what is achievable in the near term.
Economies back in growth mode
Having the worst of the pandemic’s economic impacts largely behind us has opened consumer’s wallets – releasing some pent-up demand and temporarily increasing global spending. This has heated up economies to the point where central banks are cutting back their stimulus and tapering bond purchases more quickly than initially anticipated and interest rate hikes are now considered very likely in 2022. Overall, this increased economic activity has created more demand for energy – causing a deficit in the supply/demand balance and ultimately resulting in increased energy prices.
OPEC not increasing their production hikes
Adding to the upward pressure on energy prices, OPEC+ continues to stay the course on their production output increases even in the face of pressure from the US to increase production further. Currently, there appear to be some cracks in the OPEC+ plan to bring production on as quickly as they project. In particular, African member nations of OPEC+ missed output targets by a combined 600,000 bbl/day in the most recent quarter.
Global natural gas prices soaring
Europe was under-supplied due to a lingering winter last year leading to low storage levels from the start of the year. Factors such as lower supply from Russia, lower LNG imports due to competition from other importing nations, and a politically-stalled Nord Stream 2 pipeline from Russia have culminated in skyrocketing European gas prices. Inflated European gas prices have even trickled into the North American market, which has also experienced noticeable appreciation.
Canadian infrastructure improving
Oil and gas prices in Canada are anticipated to see decreased volatility as infrastructure is expanded. With major upgrades to the NGTL system recently completed along with further expansions anticipated by April, more stability in the AECO market can be expected going forward. In addition to these projects, Enbridge’s Line 3 Expansion Project came on stream in October which should help alleviate recent bottlenecks for Canadian oil off-take. Though anticipated differential improvements from this pipeline have thus far been muted by lower volume flows in the first few months along with a shut-down of the Trans Mountain Pipeline due to the floods in B.C., Canadian oil differentials are expected to narrow somewhat as the new infrastructure begins to affect the market.
GLJ’s January Price forecast
GLJ has released our latest evaluator commodity price forecast effective January 1, reflecting the current upward market sentiment seen throughout energy markets. Our oil forecast has oil set at $64.00 USD/bbl (real) in the medium-long term while Edmonton Light crude prices have been increased to a real price of $75.50 CAD/bbl. Our gas forecast has been adjusted to reflect current market trends in the short term, while stabilizing in the longer term at $3.00 USD/MMBtu and $3.00 CAD/MMBtu in real dollars for Henry Hub and AECO respectively.
POSTED BY JUSTIN MOGCK ON JANUARY 10, 2022
As GLJ’s Director of Commodities Research, Justin leads the creation of GLJ’s price forecasts and related market research and analysis. He has also developed expertise in both conventional and unconventional evaluations and has a variety of experience with North American A&D transactions, corporate evaluations, and economic modelling.
By Justin Mogck