The Covid pandemic and geopolitical issues are likely to be key issues for the energy prices in 2022.
“What we have to have when we’re looking at these figures would be the economic debate on the use of all those commodities and the increasing demand,” Justin Urquhart Stewart, co-founder of Regionally in London, told NE Global, asked about the oil and natural gas prices for 2022. “And then the second point is geopolitical because we have never seen so much political angles on this having such effect and obviously this particularly gas, Russia, Nord Stream 2 and the – unofficial not really talked about – intercountry blackmail but in terms of border with Ukraine and the gas prices. (Russian President Vladimir) Putin will play this very effectively over the next year. What impact that’s going to have on prices? I should expect to see prices probably rise,” Urquhart Stewart argued.
According to the London-based expert oil prices will move towards $100 per barrel and the gas prices will not weaken any time soon. “We’re heading to the coldest part of the year, and I think prices will be maintained at a high level until the level of confidence that political stability or relations with Russia is developed successfully which is unlikely,” he opined.
Chris Weafer, co-founder of Macro-Advisory in Moscow, told NE Global the two most important factors for the oil price in 2022 will again be Covid-19 and OPEC+. “The former, especially if the Omicron variant forces extended travel and business restrictions, will continue to hang over demand assumptions and lead to frequent scares,” he said, adding that it seems inevitable that a return to pre-Covid demand volume will be seen later and more likely not until 2023.
Weafer noted that the latter proved very effective through most of 2021 and should again act decisively in 2022 to ensure that supply is more evenly matched with demand and inventory trends. None of the major producers in the Organization of Petroleum Exporting Countries (OPEC) and allies led by Russia, a group known as OPEC+, want to see the oil price crash under an excess supply, regardless of what consuming nations demand, Weafer said, adding that if there is a slowdown in demand in the first or second quarter then OPEC+ would probably suspend the current recovery program and wait until they see demand recovering.
US supply, especially shale, is less of a factor than it used be and the major western producers will come under even greater pressure to curtail capex in traditional hydrocarbon projects, Weafer said. “Environmental activism is ratcheting pressure on the oil majors, on the investment funds and on banks. It means that OPEC+ will be increasingly in the driving seat, in terms of growing market share, to the end of this decade, at least,” he said.
Weafer said the Biden Administration wanted to lift sanctions against Iran in exchange for a new deal with Tehran. “But they are running out of time as such a move would be deeply unpopular in the US Congress and President Biden will have to avoid any such contentious actions coming up to the mid-term elections in the US. So, the odds on a deal and for a return of 2 million barrels of Iranian oil to the export market, are falling quickly,” he said.
According to Weafer, the Brent price will trade in the $70s per barrel through the first half of 2022 with a lot of volatility in the first quarter, as Covid numbers and restrictions are likely to be worse then.
“I expect the price to stabilize close to $80 per barrel in the summer and early autumn – based on an assumption of economic recovery strengthening in 2023 and, with it, finally a return to pre-Covid oil demand,” he said.
“I expect the price of Brent to trade in the mid to high $80s in the latter part of 2022, again based on that demand recovery optimism in 2023 and with OPEC+ supply coordination continuing even past the end of the current deal. That level of coordination clearly works, and I believe Russia and the major OPEC producers, especially Saudi and the UAE, will also want that to continue,” Weafer said.
He noted that the outlier on the downside would be if Covid-19 variants prove more damaging and demand for oil falls, or event stalls, and OPEC+ takes no action. The oil prices would be in mid-$50s per barrel for a month or two.
According to the Moscow-based expert, the outlier on the upside would be if there was war between Ukraine and Russia that led to Russia being restricted within SWIFT or some other trade restrictions. He explained that Russia is the biggest supplier of oil with just over 4 million barrels per day plus oil products of just under 3 million barrels to the world economy, including 800,000 barrels of crude per day to US Gulf Coast refineries, so any disruption in that trade, or even a fear that it might happen, would lead to a much higher oil price – at least $100 per barrel for Brent – for several weeks.
Urquhart Stewart said the economic recovery should continue. “The V-shaped recovery is a loser that’ s just bouncing back from a terrible position. If we want a letter of the alphabet, it’s probably going to be not a capital but underscore ‘w’. It’s going to be going up and down, up and down, up and down, on a relatively small scale and it will be driven by geopolitical issues and, of course, the pandemic issues. This is an area completely unknown,” he said, adding that investors should expect higher oil prices and gas prices staying roughly where they are for the time being.
Turning to natural gas prices, Weafer believes the EU gas price will stay high in the first half of 2022 but does not see a crisis as such.
According to the Macro-Advisory co-founder, the price of gas will inevitably stay high in the first quarter and into the second quarter because inventories in Europe are low and demand will be high through the winter months. A colder than usual winter would push prices even higher.
Weafer expects demand to remain high into the spring and summer, rather than fall as usual, because countries and gas companies will want to rebuild the storage tanks that they let fell to low levels last winter.
He expects the price of gas to be a lot lower this time next year and coming into 2023, as Russian supply will be higher with the Nord Stream gas pipeline from Russia to Germany and with the continued use of the Ukraine transit route at least until end 2024.
“The gas crisis and price spikes seen in Europe this year, and the inevitability of high prices this winter, will guarantee that Nord Stream 2 will be approved and become operational in 2022. The timing is very uncertain, but it seems more likely to happen in early summer as gas companies in Europe will want extra volumes in these months to rebuild inventories ahead of the 2022/23 winter,” Weafer argued.
He opined that Russia will not push more gas through the Ukraine transit system than it is contractually obliged to do. That is 40 billion cubic meters per annum until the end of 2024. “Germany cannot take the risk of Russia not extending that contract and not having Nord Stream 2 fully operational. Recall that it was Germany and Russia that wanted Nord Stream 2 after the Ukraine transit crisis in 2009 and it is again both that want the safe direct route for the additional gas. Germany sees transit country routes as less secure in the same way as Russia does,” Weafer argued.
Asked if he expects any more sanctions affecting the pipeline if the situation between Russia and Ukraine worsens, Weafer noted that the major uncertainty is of course what happens in Ukraine and if there is a war or, more accurately, what type of war and for how long?
“I do not see a high risk of Russia invading, and trying to occupy, all Ukraine or even any part of it outside of the existing separatist-controlled area…. the exception being a new land bridge between the separatist region and Crimea perhaps,” he argued.
Finally, Urquhart Stewart said another area which is going to be interesting for geopolitical issues is going to be China with rare earth mining. A lot of the rare minerals needed for lithium batteries, computer chips and other key products are in China, he said, adding, “That’s going to add another level of nervousness”.