Since GLJ’s last price update in April, the energy sector, and the world as a whole, have been subject to intense and overlapping events that push on commodity prices in all time horizons. Strong demand recovery is occurring along with rapid movements in inflation and interest rates. Supply chain challenges associated with geopolitical unrest and war, ESG, climate policy and demand rebound continue to influence every facet of the global economy, including energy commodity prices. Concerns about the possibility of a recession potentially looming in late 2022 or early 2023 have added complexity to energy price forecasting.
Supply and Demand Issues
The Russian war in Ukraine has moved into its fifth month. Initial indications are that Russian oil is finding its way into the market, despite aggressive sanctions by western nations. This may have contributed to a recent fall of oil prices from peaks near 120/bbl. OPEC+ continues to appear reluctant to aggressively increase production, even if capable. North American-based producers have allocated more capital to development, but at a much slower pace than observed in previous commodity price upcycles. They prefer dividends, buybacks and debt paydown. European nations are scrambling to obtain short and long-term supply for gas with a reluctant realization that petroleum products are core to a modern economy and that demand will remain difficult to replace at scale well into the future. European storage has, so far, been able to recover to levels typical for mid-summer, but some market participants have warned about Russia’s commitment to deliver gas after the Nord Stream 1 pipeline comes back online from annual maintenance.
Russian natural gas supplies continue to be a major factor in the overall economic prospectus in Europe. Most western European countries are working aggressively to develop alternatives to Russian gas. This process takes time. Germany, Europe’s largest economy, has accepted that it simply cannot move away from Russian supply in the timeframes the public and other governments are demanding without catastrophic economic impacts to the country. Russia, however, may not cooperate. Canada’s sanction-skirting move to return critical gas turbines for the Nord Stream 1 pipeline demonstrates the complex politics of the current situation.
Strategic stockpiles of both oil and natural gas remain at levels far below normal. The United States, the world’s largest economy, continues its planned release of 1 million barrels per day of its reserves in an effort to moderate retails prices of fuel which reached highs equivalent to some experienced during the energy crisis of the 1970s. Despite this, a muted supply response has left the US domestic market in an undersupplied position. LNG is no longer just an alternative to pipeline supply for the European continent. It is now critical for confidence in long term supply. LNG has gone global.
Recession Rumblings
Depending on your financial analyst, central banker or consumer of choice, media have all but decided that a recession is inevitable in late 2022 or early 2023, or it may be entirely avoided. If it were to occur, it will either be short or medium-term and mild or acute. In other words, a crystal ball or tea leaves might just be as accurate when trying to predict a recession or not. Continued high energy prices do pose a risk to industrialized economies as do supply shortages, particularly in western Europe. Rapidly increasing inflation in Canada and the United States is causing central banks in both countries to raise interest rates aggressively. And, while it’s a tried-and-true way to tackle that beast, the trick will be to limit those hikes to levels that don’t push the economy past the tipping point into recession.
GLJ July 2022 Price Forecast
GLJ has released our latest evaluator commodity price forecast effective July 1, reflecting the current sentiment seen throughout energy markets. Our oil forecast has WTI set at $105.00 USD/bbl for the remainder of 2022 and then settling back in the medium-long term to $72.00 USD/bbl (real) in the medium-long term with the Edmonton Light crude price at $85.25 CAD/bbl (real). Our gas forecast has been adjusted to reflect current market trends in the short-term, while stabilizing in the longer term at $3.75 USD/MMBtu and $3.75 CAD/MMBtu in real dollars for Henry Hub and AECO respectively.