Key Takeaways
- We raised our West Texas Intermediate (WTI) and Brent crude oil price assumptions for 2022 and 2023
- We raised our Title Transfer Facility (TTF) natural gas price assumptions for 2022, 2023, and 2024
- Our U.S. Henry Hub and Canadian AECO natural gas price assumptions are unchanged from those published on Oct. 4, 2021
- We believe the higher oil and TTF natural gas price assumptions should strengthen our projected cash flow and leverage metrics at all rating levels
- We remain focused on issuers' financial policies and commitment to improving their balance sheets through debt reduction, particularly for investment-grade companies. We expect more positive rating actions in the non-investment-grade space
Oil prices have hit seven-year highs through a combination of strong supply-demand fundamentals and, to a lesser degree, geopolitical events that have created limited supply and added a degree of uncertainty. Temporary production outages in Kazakhstan, Libya, and Nigeria have partially contributed to the recent oil price increases. In addition, the geopolitical tensions associated with the escalating Russia/Ukraine conflict add an incremental risk premium to current oil prices. Despite these potentially temporary supply challenges, S&P Global Ratings believes a significant component of the recent strengthening of global crude oil prices is underpinned by improved market fundamentals, which should support stronger WTI and Brent prices through 2022 and 2023.
Market fundamentals appear to be supportive of current levels, if not higher prices. As the reopening theme continues to take hold, we expect demand will continue to increase. Where supply comes from to meet demand is becoming a question. OPEC has limited spare capacity to meet the expected demand increase and with global inventories relatively low, the surge could result on a "call" on North American production. In December 2021, Organisation for Economic Co-operation and Development crude oil stocks were estimated at 2,694 million barrels, representing an 11% year-over-year decrease, and 16% below 2020 peak inventory levels. How quickly and to what order of magnitude this supply responds will be critical for the direction of oil prices. Many producers in the U.S. are still under investors' watchful eye to not outspend, but at higher oil prices, they may strike a more conciliatory tone.
| S&P Global Ratings' Oil And Natural Gas Price Assumptions | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| New prices | Old prices | |||||||||||||||||||||
| WTI (US$/bbl) | Brent (US$/bbl) | Henry Hub (US$/mmBtu) | AECO (US$/mmBtu) | TTF (US$/mmBtu) | WTI (US$/bbl) | Brent (US$/bbl) | Henry Hub (US$/mmBtu) | AECO (US$/mmBtu) | TTF (US$/mmBtu) | |||||||||||||
| 2022 | 70 | 75 | 3.50 | 2.50 | 20 | 60 | 65 | 3.50 | 2.50 | 12 | ||||||||||||
| 2023 | 60 | 65 | 3.00 | 2.25 | 13 | 50 | 55 | 3.00 | 2.25 | 8 | ||||||||||||
| 2024 | 50 | 55 | 2.75 | 2.25 | 9 | 50 | 55 | 2.75 | 2.25 | N/A | ||||||||||||
| bbl--Barrel. WTI--West Texas Intermediate. TTF--Title Transfer Facility. AECO--Alberta Energy Co. mmBtu--Million British thermal units. Note: Prices are rounded to the nearest $5/bbl and $0.25/mmBtu. Source: S&P Global Ratings. N/A--Not applicable. | ||||||||||||||||||||||
The TTF forward curve has increased, and we expect the market rebalancing will take longer. European gas stocks are well below multiyear average levels and are unlikely to be replenished soon. Supply remains tight. Europe's indigenous production is in structural decline, and pipeline flows from Russia are lower than in previous years. The start of Nord Stream 2 has been delayed for regulatory reasons and the timing remains uncertain. We expect some increase in liquefied natural gas (LNG) shipments to Europe as global LNG utilization rates are up and will remain high as long as European gas prices offer a premium above Platts Japan Korea Marker. High prices for gas result in some demand destruction for industrial applications (such as fertilizers) and limit gas competitiveness compared with other fuels such as coal. However, high carbon prices reduce gas disadvantage. The planned phaseout of coal-fired and nuclear power generation in Europe, as well as the lack of energy storage to complement intermittent renewable generation, leaves limited technical alternatives for gas in the short term. TTF spot prices are well above gas prices under long-term contracts, and we will continue to monitor the impact of hedges on various market participants.
We expect European TTF prices to remain very volatile, depending on weather conditions and unexpected supply fluctuations in 2022. We believe that the widening gap between relatively resilient demand and declining domestic production, as well as low stocks and unwillingness to lock in long-term gas contracts in light of green policies, increases exposure to global gas industry developments. We also expect prices will be highly sensitive to the political developments around Ukraine. We think the current prices incorporate some apprehension by the market, which could move in different directions, resulting in very high volatility.
Longer term, however, we expect gas markets will rebalance as new LNG capacities come on stream, and therefore we're keeping our post-2024 TTF price assumption at $6 per million British thermal units.
Related Research
This report does not constitute a rating action.
| Primary Credit Analyst: | Michelle S Dathorne, Toronto + 1 (416) 507 2563; michelle.dathorne@spglobal.com |
| Secondary Contact: | Alexander Griaznov, Moscow + 7 49 5783 4109; alexander.griaznov@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.