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Near-Term Oil & Gas Prices Raised, Long-Term Oil Price Unchanged

Fitch Ratings has increased its 2022 and 2023 oil price assumptions for Brent and West Texas Intermediate (WTI) benchmarks to reflect improved demand and expectations that OPEC+ will continue to manage supply, at least in the short to medium term. The increased Title Transfer Facility (TTF) gas price assumptions for 2022 and Henry Hub gas price assumptions for 2022-2023 reflect ongoing supply disruptions, which we expect to gradually dissipate. The long-term oil and TTF price assumptions remain unchanged.

We have increased our near- and medium-term assumptions but recognise that the situation in the commodity markets remains highly uncertain given the emergence of the Omicron coronavirus variant, which may result in renewed lockdowns and travel restrictions and may increase price volatility in the near term. We assume that any renewed mobility restrictions will be localised, short-lived and less severe than those introduced in 2020.

Oil demand has recovered this year, almost to pre-pandemic levels, supported by an economic recovery and increased mobility. Demand may weaken in 1Q22, which is likely to result in the market switching from a deficit to a surplus due to OPEC+’s recent decision to ramp up production in January by 400,000 barrels of oil per day, alongside the release of strategic oil reserves by the US and other nations. The recovery in oil demand might, however, continue into late 2022, and OPEC+ will likely aim to avoid large surpluses or deficits when deciding on its future production levels.

The responsiveness of US shale production will decline, at least in the medium term, as producers are now more focused on free cash flow generation, debt reduction and shareholder distributions.

OPEC+’s policies may become less efficient over time as the UAE, Kuwait, Iraq, Russia and other countries are considering increasing production in order to monetise their large reserves while demand could be affected by the impending energy transition. Our long-term oil price assumptions remain unchanged and reflect our view on the marginal cost of supply and energy transition risks.

The increased TTF price assumption for 2022 reflects a spill-over of current record-high prices into 1Q22. We expect such high prices to be transitory as the global natural gas market has capacity to produce more gas, while increased demand from Asia and Europe is not sustainable once gas storage facilities are filled to normal levels.

The increased Henry Hub price assumptions for 2022 and 2023 reflect supply bottlenecks, which we expect to be resolved gradually, as well as strong demand for LNG from Asia and Europe, which we also expect to gradually normalise. A minor increase to Henry Hub assumptions from 2024 reflects increasing weather-related production disruptions.

Our updated assumptions for 2021 largely reflect year-to-date average prices.
Source: Fitch Ratings

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