2022 will be the year not of elections in Australia, the US and France for example, but of energy prices.
OPEC+ has again committed itself to the gradual reduction in its production cap by 400,000 barrels a day per month into 2022.
That saw a dip in global prices back to just under or around the $US80 a barrel level after prices surged past that area in October and threatened the $US90 a barrel level.
If prices anchor around the $US80 a barrel or lower, even as demand grows (especially for jet fuel outside the US) in early 2022, then the inflationary impact of this rise in oil prices will slowly fade.
But if prices break higher for some reason – a storm or major event in the Middle east, then confidence that inflation is on track to slowly ease in 2022 will fade the prospect for rate rises will grow.
We saw the Bank of England on Friday refuse to lift rates, even though it sees UK inflation reaching 5% next April. The Fed and Reserve Bank of Australia are also in the patient, wait and see stance.
In Australia, higher oil and petrol prices have been the major driver of inflation – and yet our inflation rates – both headline and underlying – remain significantly lower than the US or UK, so all the kerfuffle about the need for higher rates is just hot air.
In Australia what happens to oil and gas pricing in 2022 will also have a major influence on the mergers of Santos and Oil Search and the deal that will see BHP sell its oil and gas businesses into a merger with Woodside.
Solid prices, especially for LNG will make the first year of the merged companies that much easier, weakening prices will see stepped up pressure on both to cut costs more deeply than planned.
After gradually rising since early this year, energy prices took off in August with steep rises in the prices of oil, gas and coal, intensifying cost pressures for a range of industries and countries and are now a major source of rising inflation globally.
And that makes these higher energy costs a major threat to global growth and growth in many economies – especially China and parts of Asia, the US, Australia and Europe.
Yet they are also an opportunity or rather illustrate the opportunity for renewables of all types, especially electric vehicles (EV).
So why have energy prices surged in the three or so months?
The simultaneous surge in energy commodity prices across many regions has resulted from demand outstripping existing supply thanks to the rapid rebound of many economies from pandemic driven lockdowns.
So far this year, U.S oil prices have risen about 70% to around $US80 a barrel and natural gas futures futures were up about 100%. Brent is up a similar amount this year.
This has come after half a decade or more of declining investment (especially since the collapse in oil prices from mid 2014) in energy projects, overlain by growing reluctance to spend money on carbon-based fuel sources as the climate change challenge has spread to more sectors – especially banking, finance and insurance.
This decline of investment in production of all types of fossil-based fuels is now restricting the sector’s ability capacity to quickly respond to demand surges.
The jump in prices would normally have seen an immediate step up in announcements of spending plans by big oil and gas companies, and talk of expansion from existing resources. But not in a global warning environment.
So the question looking out into 2022 is what will change to mitigate the surge in prices?
Higher production or weak demand? Well, global economic growth is widely forecast to slow next year. Chinese growth – the major determinant of the strength of commodity prices – is predicted to slow from around 8% this year to 5.5% in 2022.
In a note issued late earlier this week, analysts at Moody’s rating agency made the upbeat prediction “We believe that energy prices will ease in 2022 because some factors contributing to the current market dislocations are transient and will be resolved soon.”
“However, companies will need to reverse the declining investment trend to lower oil and natural gas prices in the medium term.”
Convincing government’s investors, insurers and ratings group like Moody’s will be a major task for companies in the energy sector.
To invest more to produce more carbon-based fuels goes against the growing belief in global warming and the need to cut world temperatures by 2030 and 2050.
The sharp rebound in economic demand from re-opening economies has pushed all energy prices higher, “while varying price volatility revealed differences in market structures, as well as a number of short-lived supply and demand dislocations,” according to Moody’s.
“In the last three months, Brent crude prices increased 20% to above $80/bbl, while natural gas prices are hovering at multiyear highs, having doubled in Asia and Europe and risen more than 50% in the US. The simultaneous increase in prices across geographies reflects demand outstripping existing supply amid a rapid and broad-based rebound of shuttered economies.
“We expect natural gas and thermal coal prices to ease in 2022 because many of the factors causing price spikes are unlikely to persist after the coming winter season in the Northern Hemisphere.
“With inventory levels unusually low in Europe and Asia, gas prices incorporate a significant “cold winter” premium that adds to the usual seasonal uptick. In South America, dry weather caused Brazilian utilities to turn to natural gas to compensate for lower than usual hydro power output.
Moody’s says that in Europe, demand for liquid natural gas (LNG) rose more than expected because of a lower contribution from intermittent renewables, lower pipeline imports and the need to rebuild unusually low storage before winter weather.
European gas prices increased sharply to match Asian spot prices as both regions competed for limited LNG volume, which also boosted demand for coal despite its higher prices. Thermal coal and LNG prices are linked because of their use in the power sector – and that has been clearly the case in China and Europe.
On the supply side, the global LNG market was temporarily caught short by rapidly increased demand, despite a sharp rise in production capacity in 2019-20 that was widely forecast to put downward pressure on prices and adversely impact LNG companies in Australia (It was the pandemic and lockdowns in 2020 and the way they crushed global demand that did the damage, not the higher capacity).
Moody’s said that the recent northern summer saw a conjunction of events in the global gas sector.
“Large LNG facilities in Norway, Peru, West Australia went off-line in the summer of 2021 for short-term unplanned maintenance, and large LNG producers such as Trinidad and Tobago and Nigeria were managing temporary declines in natural gas production.”
“We expect that it will take the best part of 2022 to resolve the dislocation in the international gas markets and ease global gas prices, amid the restart of LNG capacities.
Gas is less flexible in its ability to respond to the greater demand, compared with oil where OPEC plus could change everything and take the pressure out of all energy markets by getting rid of its production cap.
OPEC will be under rising pressure from governments to further relax its cap next year with prices clearly recovered, demand strong (The International Energy Agency thinks the demand will rise to pre pandemic levels sometime in 2022 and stay there).
But this flexibility will run headlong into the carbon emissions problem, and from investors pressuring oil companies not to spend more on existing and new fields and deposits, but to return more to them.
Exxon Mobil responded to that quickly last Friday when it made clear at its third quarter results briefing that it will be soon returning to its regular buyback scheme that it abandoned in the pandemic last year.
Exxon had run buybacks for years and at times looked like it was self-liquidating at times by returning so much as to shareholders.
“As the OPEC-plus group reverses prior production cuts, it is reducing its spare production capacity and its ability to ease prices in 2022, possibly risking further oil price increases amid increasing demand,” Moody said.
“The rise in oil production in 2022 outside of the OPEC-plus countries would need to quicken for the market to rebalance without creating further oil price increases. ”
And coal prices? Well, after the Chinese government stuffed up its pricing policy, Chinese thermal coal futures prices surged to close to $US300 a tonne, and then fell back to around $US150 a tonne when the government took fright at what it had allowed and monstered futures trading, coal miners and the companies that run the exchanges and pricing indexes.
That rippled through coal prices outside China and the prices outside china have fallen sharply as well. The Newcastle thermal coal futures price has fallen from around $US287 a tonne to $US154 a tonne this week.
Coal prices are not going to be a concern in 2022, it’s going to be coal use that attracts all the publicity. All those Australian and US urgers flocking back into coal will be very disappointed next year.
Banks, insurers and central banks and regulators are now very negative on coal investments, a little less so for oil and gas, and that will see coal capacity slowly fall in coming years as new mines don’t open and expansion of existing operations are denied.
