S&P Global Ratings' new long-term natural gas price assumptions are higher than previously published prices largely because of our belief that natural gas has favorable fundamentals as a bridge fuel in the energy transition story. We believe many economies worldwide will continue to utilize natural gas to meet greenhouse gas and carbon regulatory standards, while continuing to transition and adopt other sources of energy such as renewables. These price revisions are effective immediately (Table 1).

Table 1

We use this price deck as an input to our ratings analyses to assess credit quality for hydrocarbon-related corporate, sovereign, local and regional governments, and project finance issuers, in accordance with the approach described in "How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions," published Sept. 28, 2018.

Since our last price deck revision in August, hydrocarbon prices have remained on an upward trajectory due to COVID-19 vaccine rollouts and the reopening of global economies. Oil prices are trading at seven-year highs. Thus far, OPEC has remained disciplined in releasing oil back into the market, and public U.S. shale producers are still operating under a financial policy mantra that targets free cash flow for debt reduction, returning value to shareholders and limiting rampant production growth. Hurricane Ida also temporarily removed some U.S. production from the market. Furthermore, China has ordered its energy firms to stock up on oil and natural gas/liquid natural gas (LNG) ahead of the winter as global inventory levels remain below five-year averages.

Moreover, there is potential for prices to go higher as some switching globally might occur by utilities and industrial companies from high-priced natural gas and LNG to oil. With this backdrop, oil prices have substantially rebounded from the depths of the COVID-19 pandemic (Chart 1).

Chart 1

Our assumptions remain below the New York Mercantile Exchange futures strip for 2022 and 2023. We believe OPEC is comfortable with oil prices trading in the current range and will not want them to reach levels that result in substitution or an acceleration of the transition to renewable energy.

While oil prices have had a nice run, natural gas prices have been on a tear. The price of Henry Hub natural gas has surged more than 230% year over year due to a warmer than expected summer, strong industrial demand, and a robust LNG export market. Summer was also warmer than normal in Europe, and renewables such as wind power failed to bridge the supply/demand gap, leading to low stocks right before the heating season. Meanwhile, U.S. producers remain relatively disciplined with production, which dropped global natural gas inventory below averages for this time of year. If the upcoming winter proves colder than normal, global natural gas prices could very well rise.

Despite the recent volatility in Alberta Energy Co. (AECO) gas prices, we maintain our 2021 and 2022 assumptions we published on Aug. 13, 2021. The recent price volatility at the AECO hub is related to maintenance on the Nova Gas Transmission pipeline. We expect the AECO price for the remainder of 2021 and 2022 should remain within a 20% band relative to our current assumptions. Completing the maintenance work should bring about 500 million cubic feet per day of transportation capacity back into service.

S&P Global Ratings raised its 2023 and 2024 AECO natural gas price assumptions to $2.25 per million Btu (mmBtu) from $1.50 per mmBtu. We believe strong demand for Canadian gas exports into the contiguous U.S. states should continue beyond the near term and provide price support over the medium to longer term. Reduced associated gas production in the U.S., compounded with accelerating LNG exports, should continue to support the need for Canadian imports through 2023.

We expect Canadian gas production will increase during our price deck timeframe. S&P Global Platts Analytics forecasts Canadian gas production will increase 600 million cubic feet per day winter over winter based on producers' plans laid out this year. Furthermore, as natural gas transportation capacity will accommodate the projected increased production, we expect AECO will continue to price inside of transport economics. Even if domestic production growth accelerates, Platts estimates the Nova Gas Transmission's Upstream James River production zone will have 700 million-1 billion cubic feet per day of available transportation capacity beyond what its forecast implies this winter. Since we expect sufficient export pipeline capacity available, our assumed differential between our longer-term Henry Hub and AECO prices remains $0.50 per mmBtu.

Title Transfer Facility (TTF) prices and forwards have significantly increased, and we expect the market rebalancing to take time. Europe's gas stocks are below normal before the seasonal pickup in demand, in part due to summer gas use given less power generation from renewables such as wind. Supply remains tight due to higher competition for LNG from expanding Asian markets and lower than expected Russian supply. Europe's indigenous production is in structural decline. We expect supply to pick up somewhat as TTF trades close to the Japan-Korea-Marker and attracts more LNG flows as well as some LNG capacity returns to the market from maintenance. Although at current high prices, gas is less cost-competitive than coal or even liquids, and high carbon prices reduce the gas disadvantage. Demand for gas is structurally supported by mandatory closures of large coal-fired and nuclear power generation capacity in Europe, which leaves gas with an important role to back up increasing renewables.

We expect European TTF prices to remain volatile because of the widening gap between demand and declining production, location, and well-developed gas storage and transportation infrastructure. These factors fundamentally expose it to imports of LNG and pipeline gas and, therefore, to global gas industry developments. Low gas stocks can also increase price volatility depending on weather conditions or unexpected gas production outages in 2021-2022.