(Editor's Note: The European (TTF) gas prices in this article are no longer current. Our updated TTF price assumptions can be found in "S&P Global Ratings Raises European Gas Price Assumptions On Uncertain Supply," published Aug. 1, 2022. The oil and North American gas prices were restated unchanged, without additional commentary. )
S&P Global Ratings raised its Brent and West Texas Intermediate (WTI) crude oil price assumptions $10 per barrel for the remainder of 2022 and 2023. We also significantly raised our Henry Hub and AECO natural gas price assumptions for the remainder of 2022 and 2023. Our Title Transfer Facility (TTF) European gas price assumptions are unchanged.
Key hydrocarbon benchmark prices are persistently higher and appear likely to remain elevated for longer as the Russia-Ukraine conflict and sanctions continue. Demand for oil and products continues to trend upward even as additional supply constraints affect markets already tightly balanced at the start of 2022 before the conflict. Russia is one of the largest oil and gas exporters. As EU countries implement policies to reduce reliance on both Russian oil and natural gas, we expect natural gas prices to remain elevated over the next couple of years, as demand for liquefied natural gas (LNG) from the U.S. increases to offset Russian supplies.
We anticipate the assumed higher oil and natural gas prices will further improve leverage for oil and gas producers in 2022 and 2023, notwithstanding windfall taxes in the U.K. and elsewhere. For investment-grade corporate issuers, we remain focused on companies' financial policies and their intended use of additional cash flow over the next year or two as well as their likely resilience at lower prices. As noted in "FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions", published Sept. 28, 2018, our assumptions in the last period (year three and beyond) primarily reflect our view of long-term sustainable prices based on fundamental analysis including producers' cost curves.
Many speculative-grade issuers already have very strong credit measures, with upgrades often limited by producers' business risk profiles. Consequently, we do not anticipate immediate and widespread upgrades for exploration and production issuers because of these revised near-term oil and natural gas price assumptions.
Table 1
| S&P Global Ratings' Oil And Natural Gas Price Assumptions | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --New prices-- | --Old prices-- | |||||||||||||||||||||
| WTI ($/bbl) | Brent ($/bbl) | Henry Hub ($/mmBtu) | AECO ($/mmBtu) | TTF ($/mmBtu) | WTI ($/bbl) | Brent ($/bbl) | Henry Hub ($/mmBtu) | AECO ($/mmBtu) | TTF ($/mmBtu) | |||||||||||||
| Remainder of 2022 | 95 | 100 | 8.25 | 5.50 | 30 | 85 | 90 | 5.75 | 4.25 | 30 | ||||||||||||
| 2023 | 80 | 85 | 5.50 | 4.25 | 25 | 70 | 75 | 4.25 | 3.25 | 25 | ||||||||||||
| 2024 and beyond | 50 | 55 | 2.75 | 2.25 | 15 | 50 | 55 | 2.75 | 2.25 | 15 | ||||||||||||
| bbl--Barrel. WTI--West Texas Intermediate. HH--Henry Hub. 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. | ||||||||||||||||||||||
Oil Price Assumptions Step Up
We now assume WTI will average $95 per barrel (bbl) for the rest of 2022 and $80 per bbl in 2023, and that Brent will average $100 per bbl and $85 per bbl over the same periods. Crude oil prices have continued on their upward trajectory in recent months, with both WTI and Brent up well over 50% year to date as the Russia-Ukraine conflict evolves and the global supply-and-demand balance remains tight. The most recent round of EU sanctions on Russian oil aim to eliminate about 90% of Russian oil imports into EU countries by year-end 2022, with the exception being pipeline imports to heavily reliant countries such as Hungary. Prior to the war, EU countries imported about 2.2 million barrels per day of Russian crude. However, not all these volumes will be removed from the global market. Buyers in Asia, particularly India and China, have absorbed Russian oil in recent months, taking advantage of the steep Urals and ESPO blend discounts, reported to be about $35 per bbl. ESPO blend is Russia's flagship crude supplied via the East Siberia Pacific Ocean (ESPO) pipeline to Asian markets. Nonetheless, these sanctions could also make sales to Asia more difficult given they also include a ban on European insurers insuring tankers carrying Russian crude oil anywhere in the world.
The OPEC+ alliance, which has come under more pressure to increase volumes to the market above its planned monthly 400,000 bbl/d production quota add-backs, agreed to increase volumes 648,000 bbl/d in July and August. We note that supply from some OPEC+ producers has not increased to their quotas.
We expect prices will remain buoyed by geopolitical uncertainty, the lack of near-term supply growth, low inventory, and dwindling spare production capacity. In our view, North American producers will unlikely ramp up volumes beyond their initial planned activity. These producers continue to grapple with a tight labor market and significant cost inflation, and also remain committed to prioritizing shareholder returns over production growth. We also view increased Iranian or Venezuelan volumes as unlikely, at least through 2022, as negotiations appear to have stalled. Inventories in the U.S. are about 13% lower than this time last year and 15% lower than the five-year average for this time of year. Organization for Economic Cooperation and Development inventories are down 8% from this point last year and 10% lower than the five-year average. Demand is likely to be strong over July and August on both the driving season in the U.S. and recovery in China from COVID-19 pandemic-related lockdowns. Later in 2022 and 2023, the demand growth trajectory may be tempered in tandem with weaker market expectations for economic performance as high inflation and interest rates are coupled with Russia-Ukraine related challenges.
Chart 1
U.S. Natural Gas Henry Hub Assumptions Reflect Market Moves
We raised our Henry Hub natural gas price assumptions to $8.25 per million Btu (mmBtu) for the rest of 2022 from $5.75 per mmBtu and $5.50 per mmBtu for 2023 from $4.25 per mmBtu.
Chart 2
Typically, natural gas demand and prices wane as the weather warms. However, North American natural gas prices have continued to increase this year. This is due to several factors that we believe will remain in place for the next couple of years. The economy in North America has strongly rebounded from the pandemic. Coupled with an insufficient response in supply, driven in part by producers' capital discipline and more recently supply chain and labor market constraints, U.S. natural gas inventories are 17% lower than last year's levels and 15% below the five-year average. Additionally, the average rate of injections into storage is about 10% lower than the five-year average in the refill season, which started in April and runs through October.
Chart 3
North American gas supply growth remains subdued as companies continue to heed investor sentiment to limit capital spending and production growth, and to direct free cash flow to shareholders. We also expect record LNG demand from Europe will continue to surge as EU sanctions take hold and many European countries look to reduce their exposure to Russian natural gas. Given the logistics, we believe North America is best suited to respond. The U.S. Energy Information Administration predicts that by 2025, LNG export capacity will increase by 3 billion-4 billion cubic feet per day (bcf/d) to 16-17 bcf/d, and that most incremental volumes will find their way to Europe. We also believe high LNG exports from the 48 contiguous U.S. states should extend to supporting demand for Canadian natural gas through 2023.
We Also Raised Our Canadian Natural Gas AECO Price Assumptions
S&P Global Ratings also raised its AECO, the Canadian benchmark price for natural gas, assumption to $5.50 per mmBtu for the rest of 2022 from $4.25 per mmBtu and $4.25 per mmBtu for 2023 from $3.25 per mmBtu. Our 2024 long-term AECO price assumption is unchanged at $2.25 per mmBtu, reflecting a 50 cents per mmBtu basis differential from our long-term Henry Hub price assumption. The supply-and-demand fundamentals driving U.S. natural gas prices higher also underpin the stronger AECO price. As the EU seeks alternatives for Russian oil and gas imports, stronger demand for U.S. LNG exports has pushed U.S. natural gas prices to historic highs. Although a U.S. shale response to current market dynamics remains uncertain, we continue to believe sustained U.S. LNG exports from the contiguous 48 states will mean demand for Canadian natural gas exports to satisfy domestic gas needs will be sustained at least through 2023.
Low Canadian gas inventories also add incremental support to near-term prices. Canadian gas in-storage as of June 3, 2022, of approximately 307 bcf is over 100 bcf lower than the same time last year and well below the five-year average of 500 bcf, supporting current high prices. Furthermore, the Canada Energy Regulator expects limited growth in Canadian natural gas production over the next three years, which should keep gas prices elevated. We expect U.S. demand for Canadian gas exports is unlikely to soften. Canadian producers have signaled that supply chain disruptions and labor shortages have contributed to the inability of companies to drill aggressively. Most companies are drilling just to maintain production as the focus remains on repairing balance sheets and increasing shareholder returns.
Chart 4
European Natural Gas TTF Assumptions Remain Historically High
Our price assumptions for TTF are unchanged. The extreme geopolitical uncertainty from the Russia-Ukraine conflict continues to compound the already tight European gas market. Even though Russia continues to supply gas to major markets, concerns about sufficient gas persist, given some supply cuts related to the payment mechanism instigated by the Russian government, sanctions on Nord Stream 2, and risks related to Ukrainian transit. At this stage, the full ban on Russian gas in Europe is not part of our base case. Still, a material cut in Russian gas supply remains a clear downside and could trigger additional volatility spikes and government intervention.
High prices are supported by the structural decline in Europe's indigenous production and the fact that most global LNG supply is locked into long-term contracts. We believe prices of about $30 per mmBtu could be sufficient to justify gas demand destruction and redirect flexible LNG cargoes from Asia for the rest of 2022. The 2022-2023 heating season will be tight, and Europe's plan to refill gas storage to 80% by Nov. 1, 2022, and 90% by Oct. 1, 2023, adds price pressure. The planned phase-out of coal-fired and nuclear power generation in Europe, as well as the lack of energy storage to complement intermittent renewable generation, leaves limited feasible alternatives to gas in the next year or longer.
Related Research
- U.K. Energy Profit Levy Tempers Debt Reduction Prospects For North Sea Producers, June 1, 2022
- S&P Global Ratings Raises Oil And Gas Price Assumptions On Persistent Geopolitical And Supply Concerns, April 28, 2022
- Credit FAQ: Wild Swings In Oil And Gas Prices: What Are The Drivers And Where Do We Go From Here?, March 24, 2022
- Extremely High And Volatile Gas Prices Signal A Structural Shift In Europe's Energy Market, March 17, 2022
- FAQ: How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions, Sept. 28, 2018
This report does not constitute a rating action.
| Primary Credit Analyst: | Simon Redmond, London + 44 20 7176 3683; simon.redmond@spglobal.com |
| Secondary Contacts: | Thomas A Watters, New York + 1 (212) 438 7818; thomas.watters@spglobal.com |
| Michelle S Dathorne, Toronto + 1 (416) 507 2563; michelle.dathorne@spglobal.com | |
| David Lagasse, New York + 1 (212) 438 1203; david.lagasse@spglobal.com | |
| Paul J O'Donnell, CFA, New York + 1 (212) 438 1068; paul.odonnell@spglobal.com |
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