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Fitch Ratings Raises Gas Price Assumptions, Adjusts Short-Term Oil Prices

Fitch Ratings has increased its short- and medium-term gas price assumptions, primarily due to the European gas supply crisis, while adjusting short-term oil price assumptions in line with year-to-date (ytd) pricing and demand concerns.

We have increased our European TTF and US Henry Hub gas price assumptions for 2022-2025. Our European gas prices factor in no supplies of Russian gas to the EU from now on. The margin for error to balance the EU gas market this winter is small, and we expect far higher gas prices, particularly in 2022-2023.

Lower demand and higher liquefied natural gas (LNG) imports are vital for the avoidance of acute shortages in Europe. Gas consumption fell in the EU by 11% yoy in 5M22. We estimate that demand destruction accelerated further during the summer due to the record-high spot prices. However, these higher prices in Europe have helped significantly increase LNG supplies to the region. The EU imported 75 billion cubic metres (bcm) of LNG in 8M22, up 62% yoy.

The EU has achieved its 80% gas storage use target two months ahead of 1 November. However, gas in storage covers only 20%-25% of annual consumption, so the need for LNG supplies will continue in the medium term, which will support prices. In the longer term the gas supply crisis will help remove bottlenecks in LNG and pipeline infrastructure and accelerate the energy transition and energy savings initiatives in Europe. Our long-term gas price assumptions are therefore unchanged. However, the EU is working on a package of energy measures that are not reflected in our price assumptions and may affect European gas prices.

Higher US gas price assumptions are supported by increased domestic consumption in 2022, but also by significantly increased demand for LNG exports. However, US gas production is growing, particularly in the Haynesville Shale and Permian Basin, with private operators particularly active in adding rigs, which will moderate prices. Infrastructure limitations for LNG exports in the US will keep a large spread between US and European gas prices over the medium term.

Our reduced Brent and WTI assumptions for 2022 reflect ytd oil pricing driven by concerns about economic growth. Oil spot prices have recently declined, especially compared to the levels in March and June, due to fairly resilient Russian export volumes and a potential revival of the Iran nuclear deal, which could add 1 million barrels per day (bpd) of oil supply to the market.

US production is increasing, although it faces oilfield services bottlenecks and constrained capex budgets. The country’s production will rise by about 900,000bpd by end-2022 and another 900,000bpd by end-2023, according to EIA. However, OPEC+ remains cautious in its approach to quota increases and has recently cancelled a production addition of 100,000bpd to its October target.
Source: Fitch Ratings

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