Following the recovery in oil and gas demand in 2021, the market is heading towards 2022 with renewed uncertainty about prices, demand and the industry’s long-term outlook as Omicron COVID cases rise and investors continue to push companies towards decarbonisation. Will the demand for oil and gas continue to recover and clean energy installations continue to increase next year? Or will risks lurking for some time become a reality to hamper the roll-out of green energy and offset the recovery in global oil and gas demand?
The closer we get to the end of 2021, the more uncertain the outlook for 2022, with Omicron scaring governments in Europe that have already begun to tighten restrictions or reintroduce strict lockdowns in the case of the Netherlands. Britain does not rule out stricter measures, and many other European countries are tightening travel restrictions.
$ 100 oil?
Omicron’s impact on economies and fuel demand and the effect on oil demand recovery and prices will be a major theme throughout 2022, especially in the first months of the year.
As difficult as it is to predict oil prices under “normal” circumstances, the uncertainty surrounding the pandemic has made the task of predicting even more difficult. Currently, the outlook for oil is averaging around $ 70 next year to hit as high as over $ 100 per barrel at some point in 2022 or 2023.
OPEC sees a “mild and short-lived” Omicron impact on oil demand, while the international Energy Agency (IEA) expects a temporary slowdown in the demand recovery due to the new variant, but not a completely upward demand trend.
In the early days of the spread of the Omicron variant, JP Morgan said the oil could rise to $ 125 per barrel. barrel next year and $ 150 in 2023 due to OPEC’s limited capacity to increase production.
OPEC left the door open for potential immediate adjustments in its oil production policy with the Omicron uncertainty, so that the cartel’s actions would be a major driver of oil prices next year, along with COVID developments.
Oil prices are unlikely to rise to $ 100 per barrel. barrel, at least for a longer period next year, wrote Simon Flowers, chairman and chief analyst at Wood Mackenzie, in a recent post in which he discussed the key themes of oil and gas in 2022.
Some analysts expect that a harsh, colder than usual winter in the northern hemisphere will exacerbate the energy crisis in Europe and deplete its stocks of natural gas in stocks, which are already at a decade low at this time of year. This could increase the demand for heating with fuels other than natural gas, including oil products, which could potentially increase oil demand, although shutdowns limit fuel consumption.
When will the energy crisis end?
“A bad winter will push gas and electricity prices – which are already close to record levels – even higher,” says WoodMac’s Flowers.
A cold moment this weekend already sent Europe’s electricity prices to new records, as gas storage levels are low and electricity availability is also low, after France closed four nuclear reactors.
Natural gas prices are very volatile and sensitive to (the lack of) extra supply from Russia, but they are set to fall in the spring with warmer weather.
Related: Gas markets could see sudden outbreaks of volatility But even at the end of the winter season in the spring of 2022, gas prices in Asia and Europe will remain higher than pre-crisis levels, with a structurally tighter gas market than before COVID, WoodMac analysts say.
“We expect LNG prices in Europe and Asia to be more than double the average of current prices between 2015 and 2020, until new supplies become operational in 2026,” they noted.
A major risk to the outlook for the gas market next year and beyond would be whether gas will still be perceived as a reliable, cleaner fuel than coal, helping a coal-to-gas conversion and backup for renewable energy or as just another fossil fuel that should no longer be considered as “bridge fuel” for clean energy sources.
Will rising costs hold back energy conversion?
While Big Oil is targeting more investment in low-carbon energy, the pace of capacity supply of the already mature solar and wind technology may decline due to higher costs, according to a risk Wood Mackenzie sees for a potential supercycle in metals and a continued increase in clean energy plants.
Despite high commodity and transportation prices, renewable energy is on track for record growth in 2021, IEA Executive Director Fatih Birol said earlier this month, noting that “if commodity prices remain high until the end of 2022, it will wipe out 5 years. of cost reductions for wind power – and 3-year reductions for photovoltaic systems. ”
The world will still need double new annual capacity over the next five years to achieve a net zero in the 2050 scenario, the IEA said in its annual Renewables 2021 Market Report with a forecast for 2026.
According to WoodMac, rising input costs and wages, supply chain challenges and logistics could “hamper the rollout and development of a range of low-emission technologies.”
The booming U.S. solar industry is set to be torn between huge opportunities and major stumbling blocks in the coming months and years, and it is likely to see a wild “solar coaster” trip in the next few years, Wood Mackenzie earlier this month.
Related: Are the oil markets already oversupplied?
The U.S. solar cell market installed 5.4 GWdc of solar energy capacity in the third quarter, an increase of 33 percent from the same period in 2020 and the largest 3rd quarter ever. However, costs continued to rise.
“Installed costs rose across all market segments for the second quarter in a row, reflecting the supply chain’s challenges. In all segments other than housing, year-on-year price increases were the highest they have been since 2014, when Wood Mackenzie began tracking price data,” last week’s Solar Market Insight Report 2021 Q4 by the Solar Energy Industries Association (SEIA) and Wood Mackenzie showed.
The outlook for U.S. renewable energy markets and economic growth became even more uncertain when Democratic Sen. Joe Manchin of West Virginia, a crucial vote in a divided Senate, on Sunday said he would not support President Joe Biden’s proposed Build Back Better Act.
It looks like uncertainty will be the biggest single theme in the oil and gas markets by 2022.
By Tsvetana Paraskova for Oilprice.com
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