In 2023, ongoing supply growth and weaker demand growth will ease tight markets and relieve some of the price pressures that pushed energy prices higher in 2022.
That’s according to analysts at Fitch Solutions Country Risk & Industry Research, who made the comment in a new report outlining 2023’s key oil and gas themes.
“The easing in fundamentals will see prices stay below peaks achieved in 2022, but still-subdued investment and resurgent mainland Chinese demand will keep markets tight through the year adding to our view for prices to decline but remain well elevated above recent historic averages,” the analysts said in the report.
“The elevated energy prices we expect for 2023 will conspire with high raw material costs to further pressure European industrial output, with industries heavily reliant on low-cost natural gas feeling the brunt of permanently higher costs,” the analysts added.
In the report, the Fitch Solutions analysts also noted that energy security efforts by governments, along with high energy prices, “will see another strong year of investment in energy infrastructure with more projects expected to receive FID [final investment decision] in 2023”.
The analysts warned, however, that high inflation across the industry in the form of increased rig, labor, materials and equipment costs will erode the effectiveness of capital deployed compared to previous years.
Supply and Demand
Fears of a decline in supply due to a restrictive price cap on Russian crude are easing and loss of supply stemming from Europe’s ban on seaborne crude is expected to be manageable, the analysts noted in the report.
“Despite production cuts from OPEC+, and tempered U.S. shale growth, on balance we expect markets will be kept from tipping back into undersupply, as consumption eases, allowing for stocks to rebuild and paving the way for lower prices,” the analysts stated.
The analysts also highlighted that global economic headwinds are set to slow energy consumption growth.
“Demand growth for oil and gas will slow sharply in light of wider global economic slowdown, led by developed markets who return to the pre-Covid 19 trends of slower growth,” the analysts stated.
“Our Global Macro team expects a sharp slowdown in global growth from 3.1 percent in 2022 to 2.0 percent in 2023. They believe that inflation will slow in 2023 but take a while to reach central bank targets. This means that central banks will maintain a hawkish bent, with only a few economies likely to cut interest rates in 2023,” the analysts added.
“The higher interest rate environment, along with higher inflation will impact economic growth lowering our expectations for energy consumption across 2023. In particular, we expect a sharp slowdown in developed markets, in line with past economic downturns, registering just 0.5 percent annual growth in total fuel consumption for 2023,” they continued.
Rush to Ensure Energy Security
The rush to ensure energy security and elevated energy prices will see more projects achieve FID in 2023, the analysts noted, adding that climate targets will hold less weight in light of potential energy disruptions “with most countries seeking a balance to the energy mix that will see a reduction in coal in favor of renewables and natural gas infrastructure”.
“A key example of this will be Europe’s diversification away from Russian natural gas imports by pipeline,” the analysts said in the report.
“This shift will require the addition of substantial LNG import facilities both shorter-term floating storage and regassification vessels and long-term onshore import terminals,” they added.
“The efforts to secure LNG import infrastructure and supply have come at a high financial cost and ensure a high dependence on imports for some time,” the analysts continued.
Lower demand growth and increased supply should keep prices from testing the price peaks seen this year, Fitch Solutions analysts said in the report.
Although they noted that the prospect of improved supply from OPEC wildcards Iran, Libya and Venezuela all pose upside risks to supply and could see prices react strongly to the downside should output surprise to the upside, they said they anticipate OPEC+ will act convincingly to temper any price downturns.
“The prospect of a sharp fall in oil prices is our least likely view for the year,” the analysts said.
In its latest Brent crude oil price forecast report, which was sent to Rigzone Monday morning, the company revealed that it sees Brent averaging $102 per barrel this year, $95 per barrel in 2023, $88 per barrel in both 2024 and 2025, and $85 per barrel in 2026. The projections are unchanged from those in Fitch Solutions’ previous oil price forecast report, which was sent to Rigzone at the start of November.
In a separate 2023 outlook report sent to Rigzone by Enverus Intelligence Research (EIR) on Tuesday, EIR noted that it expects near-term recession concerns and oil price weakness to not obscure a tight supply outlook for 2023, “when we forecast Brent pinned above $100 per barrel on the back of OPEC supply management and EU sanctions on Russian exports”.
At the time of writing, the price of Brent crude oil is trading at $79.11 per barrel. Brent’s 2022 high, so far, was seen on March 8 at $127.98 per barrel.
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