The energy sector has had a fairly tumultuous time in
2021 with oil prices climbing steadily earlier in the year as demand recovered,
then spiking after gas demand skyrocketed thanks to fears that lower than
average stockpiles would not be enough to power Europe’s heating during winter.
Since then demand for gas has remained high following
a colder start than usual to winter in Europe while oil prices have moderated on
concerns that the new Omicron variant of COVID-19 would impact on demand.
Where then is the sector going in 2022?
S&P Global Platts Analytics expects supply to
start catching up with demand due to increased LNG exports, a rebound in the US
shale sector and the return of investment in non-OPEC crude oil production.
The US shale power up is also backed by the US Energy
Information Administration, which forecasts that the country’s unconventional
oil production will rise by 96,000 barrels per day month on month to 8.44
million bpd in January 2022.
This is led primarily by activity in the Permian
Basin, arguably the premier shale play in the US, though drilling is also
picking up in other areas such as the Eagle Ford and Bakken.
S&P also believes that concerns about new COVID
variants will add to volatility though these are likely to be overblown as
increasing vaccination rates will reduce the potential impact.
It added that prices will start to normalise as
inventories recover, though the divergence between oil and gas prices will
broaden as gas markets are expected to remain tighter longer.
The information provider added that despite the focus
on energy transition, demand for all fossil fuels is expected to increase in
2022, which will in turn drive healthy levels of investment that would ease
Key energy themes in 2022
S&P notes that the first quarter will guide the
rest of the year. Should winter prove to be colder in key markets (Asia and
Europe), it is very likely then that gas inventories will be drawn down further
to meet power demands, which will in turn lead to more gas price hikes.
A lot will also depend on how quickly supply can
catch up with demand. The reason for the higher pricing in 2021 is due to
demand recovering much faster than supply did.
On the oil front, whether the US and Iran can reach a
deal would have a major impact on prices. Lifting sanctions will add up to 1.4
million bpd to global oil supply by the end of 2022, while the lack thereof
could see crude hit the US$100 per barrel mark.
Besides the impact of winter, gas prices will also be
dependent on the delayed Nord Stream 2 pipeline that is key to bringing more
Russian gas into Europe along with Russia’s gas strategy.
Coal is also expected to see gains in 2022 as markets
such as China and India increase their consumption to meet incremental energy
demand growth, though only the latter is expected to increase imports.
“2021 was a clear example that recalibrating from
such disruptive events like COVID-19 are often multi-year exercises,” S&P
Head of Energy Pathways, Analytics, Dan Klein said.
“While recalibration will continue in 2022, it is
likely that not all energy markets will be back to normal by the end of the
year, particularly as the needs of the energy transition will require further
disruption to business as usual.”