• S&P Global Ratings raised its West Texas Intermediate (WTI) and Brent crude oil price assumptions for 2022-2023.
• We raised our gas price assumptions for Henry Hub and AECO for 2022-2023, and for Title Transfer Facility (TTF) for 2022-2024.
• We expect elevated prices and a high level of volatility for crude oil and natural gas in the near term as the Russian invasion of Ukraine evolves and we continue to assess the impact it will have on prices.
• Although we anticipate the higher oil and gas price assumptions will lead to improved near-term leverage metrics at all rating levels, we remain focused on issuers' financial policies and their commitment to improving balance sheets through debt reduction, particularly for investment-grade companies; as such we do not expect to make wholesale upgrades to the portfolio.

Crude oil prices spiked as news broke that Russia had invaded Ukraine on the morning of Feb. 24, with Brent and WTI both surpassing $100 per barrel (/bbl) intraday to reach their highest levels since 2014. Ultimately, prices settled up only modestly for the day, finding relief in comments made by U.S. President Biden and other world leaders that the fresh round of sanctions being levied on Russia would not include oil and gas exports.

We believe prices will remain elevated in the near term and are raising our S&P Global Ratings price assumptions for WTI and Brent oil, as well as for Henry Hub and AECO in 2022-2023, and for TTF in 2022-2024 (see table below for changes). While in our view, the Russia-Ukraine conflict remains the biggest risk to oil and gas prices, we believe underlying global supply and demand fundamentals have strengthened in recent months and will support higher near-term prices regardless. However, conflict-related interruptions to Russian oil and gas exports, whether from sanctions, cyber-attacks on infrastructure, or Russia withholding volumes, could result in further price spikes and we expect significant near-term price volatility as the conflict evolves.

Under our revised price assumptions, we expect oil and gas producers will generate stronger cash flows and exhibit improved leverage measures than we had previously anticipated. However, many of our high-yield issuers are generating peak financial performance in line with our ratings criteria so we do not expect widespread upgrades. For investment-grade issuers, we still look for debt reduction to warrant upgrades, but we expect limited opportunities going forward for many issuers as most have repaid debt or for some issuers, there is a lack of debt maturing in the coming years. Also, our longer-term price assumptions, which we use for investment-grade issuers, are unchanged.

Supply-demand fundamentals have underpinned a steady increase in prices.   Oil prices have climbed steadily since the beginning of 2022, supported largely by strengthening market fundamentals. Demand growth has continued to outpace supply, particularly as initial concerns regarding the omicron variant's impact on demand subsided and countries resumed plans of broader economic reopenings. At the same time, the OPEC+ alliance--which includes OPEC-ally Russia--has remained committed to its measured approach to return barrels to the market in recent months, despite the higher prices. News of several members falling short of production quota increases in recent months has also sparked concern that the market could face more impactful supply shortfalls if demand growth continues at a healthy pace.

As the Russia-Ukraine situation evolves, we will continue to evaluate the impact on our commodity price assumptions and the credit ratings of companies in the oil and gas sector.   World leaders have so far made clear that they want to avoid sanctions on Russian oil and gas exports, given the collateral damage this would cause to economies outside of Russia, particularly in the EU countries that rely heavily on Russian supplies for both oil and gas. The EU imports about 25% of its oil and more than 40% of its gas from Russia. The removal of Russian oil and gas volumes from the market would likely send energy prices soaring, exacerbate already-high inflation, and slow economic growth globally, a move that would be detrimental to many nations outside of Russia. Although increased liquefied natural gas (LNG) exports to Europe from the U.S. in recent years have softened Russia's grip on the European gas markets, it would take years to build out new infrastructure to offset the dependence on Russian gas.

Governments around the globe, including in the U.S., EU, U.K., Japan, and Australia, have announced wide-ranging sanctions on Russia that target its largest banks, state-owned entities, and high-profile individuals including oligarchs and most recently Vladimir Putin. Many have also placed export blocks on technology and other supplies to Russia, and most recently banned Russia's access to the SWIFT international payment system. Germany suspended the certification of the Nord Stream 2 gas pipeline, which the U.S. has also placed sanctions on, although we do not expect this to affect near-term gas imports.

The potential for a global supply response is complex.   According to the Energy Information Administration (EIA), Russia was the world's third-largest producer of oil and the second-largest producer of natural gas in 2020, giving it an outsized influence on global energy markets. The International Energy Agency (IEA) has stated that its members, including the U.S., have the ability to make a coordinated release of oil volumes from strategic petroleum reserves (SPR) to provide some relief to prices. According to the IEA, member countries had about 4.16 billion barrels of oil reserves at year-end 2021, including 1.5 billion barrels designated as emergency reserves.

In addition, President Biden has reiterated his call on U.S.-based oil and gas producers to increase supplies to the market and not seek to simply capitalize on the higher prices. Pressure is also being stepped up on countries like Saudi Arabia to bring additional volumes to the market, given its spare capacity and ability to ramp up production relatively quickly. However, Saudi Arabia, along with the rest of OPEC, has been working closely with Russia in recent years to coordinate a measured return of volumes to the market, a relationship that we believe could complicate its ability to easily break with existing quota agreements and disassociate with Russia.

Finally, a resolution of the Iranian nuclear deal negotiations, which both sides have signaled are progressing towards reaching an agreement, could bring some up to 1.5 million bbl/d of additional export barrels to the market by late 2022.

Changes to AECO and TTF gas price assumptions

We are raising our 2022 and 2023 Canadian AECO natural gas price assumption to US$3.00 per million British thermal unit (mmBtu) and US$2.50 per mmBtu, respectively, from US$2.50 per mmBtu and US$2.25 per mmBtu, respectively. Near-term supply and demand fundamentals signal continued price support for Canadian natural gas. Although U.S. dry gas production is expected to continue increasing, the prospect of increasing liquified natural gas (LNG) exports from the U.S. should maintain demand for Canadian gas exports into the U.S. Although a U.S. shale production response to the escalating Russia/Ukraine conflict is uncertain, any increased associated gas production would likely be offset by continued LNG export increases. As a result, we believe continued strong demand from the U.S. will provide price support for Canadian natural gas through 2022 and 2023.

We are maintaining our 2024 AECO gas price assumption at US$2.25 per mmBtu, which maintains our assumed long-term basis differential between our Henry Hub and AECO price assumptions at US$0.50 per mmBtu. Beyond the near-term, we believe expected natural gas pipeline capacity expansions, has the potential to temper demand for Canadian gas exports, thereby softening future AECO prices.

The extreme geopolitical uncertainty from Russia's military intervention into Ukraine has pushed the TTF forward curve up and further exacerbated price volatility. Even though currently, Russian gas supplies continue, the sanctions on Nord Stream 2 and risks to Russian gas supplies, especially via Ukraine, add to already tight supply situation. Europe's indigenous production is in structural decline. We expect 2022 prices to remain high to justify more LNG redirection from Asian markets, gas-to-coal switching, and some demand destruction for industrial applications (such as fertilizers). The heating season in Europe is approaching its end. We believe this should help balance the market in 2022-2023.

Still, we expect market rebalancing to take longer because European gas stocks are well below multiyear average levels and are unlikely to be replenished soon. Most global LNG supply is locked into long-term contracts, with limited volumes available for spot sales or redirection before large new LNG capacity comes on stream by 2025. 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.

Longer term, we expect TTF to converge to about $8, at a $5 premium over Henry Hub. 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 supply changes. 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 Europe's exposure to global gas industry developments.

As the situation with Russia evolves, we will continue to monitor the impact and make any necessary communication to the markets in a timely manner.