Oil and Gas Prices To Rise Across The Board, Fitch Ratings Says

American credit rating agency Fitch Ratings has increased its short- and medium-term oil price assumptions, reflecting the increasing number of buyers boycotting imports from Russia.

Fitch has increased its Brent and WTI price assumptions for 2022-2024 by $5 per barrel (bbl) with the Brent price for 2022 rising to $105 per bbl, while the prices for 2023 and 2024 rose to $85 and $65 respectively. Prices for 2025 and the long term remain flat at $53 per bbl.

The $5 boost to price assumptions lifts WTI for 2022 up to $100 per barrel while 2023 and 2024 prices rise to $81 and $62, respectively. WTI prices, like Brent, will for now remain flat for 2025 and the long term.

Global oil prices will be underpinned by the need to redirect trading flows as a growing number of countries ban Russian oil, including the most recent agreement by the EU to embargo Russian seaborne exports of oil and oil products.

Oil delivered from Russia into the EU by pipeline is temporarily exempted from the ban to allow landlocked countries such as Hungary, Slovakia, and the Czech Republic extra time to substitute Russian imports with oil and products from other sources.

The agreement, part of the sixth package of EU sanctions against Russia, bans purchases of Russian seaborne oil and oil products or about 4 MMbpd – two-thirds of Russian imports into the EU. Germany and Poland pledged to end Russian pipeline imports by the end of 2022 with the agreement ultimately covering 90 percent of all Russian oil and products imports into the bloc.

This ban will have a significant impact on global oil trade flows, with about 30 percent of EU’s imports needing replacement from other regions, including the Middle East, Africa, and the US.

However, Fitch believes that redirecting all Russian oil and product volumes may not be possible due to infrastructural limitations, buyers’ self-restrictions, and logistical complications.

As a result, the company believes that about 2 MMbpd to 3 MMbpd of Russia’s oil exports, or about a quarter of the country’s oil production, may disappear from the global market by the end of 2022.

There of course is OPEC+, excluding Russia, which could rebalance the market if oil prices threaten to rise to levels seen as unsustainable in the medium-and-long term.

Fitch stated that oil demand could exceed 100 MMbdp in 2H22, provided the pandemic remains mostly under control, and improve further in 2023, exceeding the prepandemic oil consumption recorded in 2019. This means that demand will increase by about 2MMbpd in both 2022 and 2023.

Growing Reliance on LNG

The increased TTF price assumptions for 2022-2025 reflect disruptions to established supply channels in Europe and the need for significant infrastructural changes and new contractual arrangements to replace Russian gas.

Fitch TTF assumed prices are now set at $25 per mcf for 2022 which is on par with the $5 price assumption rise across the board. 2023 and 2024 assumed prices are now $15 and $10 while 2025 and long-term prices do not remain flat as with Brent and WTI and will presumably rise by $2 per mcf to $7 from $5.

Europe imports about 60 percent of its gas demand, according to BP’s Statistical Review of World Energy, with Russia supplying about a third of European gas consumption until recently – about 152 bcm by pipeline and 17 bcm as LNG. Germany and Italy are the largest importers.

The recent European Commission REPowerEU package proposed to replace about 100 bcm of Russian gas by year-end with 50 bcm of additional LNG supplies from elsewhere, and the remainder coming from wind and solar expansion, energy savings, and diversification of pipeline gas sources.

The US has agreed to supply an additional 15 bcm of LNG to the EU within a year, having exported 22 bcm to the EU in 2021. Since a significant share of US LNG exports goes to Asia, competitive European prices may encourage the redirection of greater volumes.

Fitch believes the EU’s REPowerEU plan is feasible in the medium term if proposed increases in LNG capacity materialize while competitive gas prices in Europe keep redirecting LNG from Asia, on top of additional pipeline supply from Algeria and growing renewables and energy efficiency. This is likely to result in sustained high gas prices. The bloc has already increased its LNG imports by 19 bcm or more than 50 percent in the first five months of 2022.

Also, Fitch increased all gas price assumptions for the US Henry Hub benchmark, reflecting higher demand, primarily driven by growing LNG export capacity. US natural gas production growth has been modest so far, despite significantly increased spot prices, as producers have been focusing on maximizing FCF generation.

Henry Hub assumed prices now stand at $6.25 per mcf which is $2 higher than the previous assumption for the year. Price assumptions for 2023 – 2025 as well as the long term are also higher but rise less than $1 per mcf and as low as $0.25 per mcf in the long term.

To contact the author, email bojan.lepic@rigzone.com