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Latest Analysis as we lead in to 2022

Latest Analysis as we lead in to 2022

 

Analysts at Fitch Solutions Country Risk & Industry Research have revealed their “key” oil and gas themes for 2022 in a new report.

One such theme is a forecast that oil markets will shift from undersupply to oversupply in the first half of next year. The change should lead to lower oil prices and a potential divergence in production between OPEC+ and non-OPEC members, according to Fitch Solutions analysts.

“Despite the emergence of the Omicron variant in late 2021, OPEC+ have confirmed they will continue with a monthly production increase of 400,000 barrels per day,” the analysts stated in the report.

“This, combined with the coordinated release of strategic petroleum reserves orchestrated by the U.S. over the early months of 2022, will see increased supply come onto the market despite concerns that demand growth is slowing and with the impact of Omicron still unclear,” the analysts added in the report.

Another theme is that U.S. output is expected to climb “substantially” in 2022 with crude, NGPL and other liquids production posting gains of 1.45 million barrels per day, or 8.5 percent year on year, Fitch Solutions analysts outlined.

“The move higher comes despite reticence from publicly-listed independents in the shale patch to substantially raise investment,” the analysts stated in the report.

“Instead, most publicly traded firms in the U.S. shale patch are likely to continue favoring shareholder returns through dividends and share buybacks over more expansive production growth. Higher growth will be fueled by private firms, technology improvements and sustained drilling efficiency,” the analysts added.

“Despite the drawdown in drilled but uncompleted wells across 2021, which likely targeted the best and highest output areas, we expect efficiency gains and increased initial production rates to persist rather than decline as new acreage is drilled,” they continued.

Investment to Tilt Away from Upstream, China Downstream Rise

The report also projects that oil and gas investment will tilt away from upstream to low carbon efforts.

“Increasingly, publicly-listed firms will ramp up commitments to reduce climate impacts from operations. This will divert capital from traditional upstream investments to low carbon investments,” Fitch Solutions analysts said.

The analysts also noted that the long-held view of China’s emergence as the top downstream refiner looks poised to take place in 2022, in light of U.S. climate commitments, stagnating demand and the poor outlook for refinery margins for older facilities.

“Increased efforts in the U.S. to stem the impacts of climate change will further increase the regulatory burden on refineries,” the analysts said.

“In the case of older facilities with less complex refining slates, it will force margins lower as the cost of compliance is expected to increase,” they added.

“China, on the other hand, will benefit from the younger age of refining capacity and a more supportive government hand in transitioning environmental regulations to combat climate change,” the analysts continued.

Wood Mackenzie Global Upstream Outlook

In a separate statement sent to Rigzone on Monday, Wood Mackenzie’s vice president of upstream research, Fraser McKay, said the upstream sector is going into 2022 facing “peak uncertainty”, with record cash flows but increasing scrutiny.

“At a Brent price of around $70 per barrel, oil and gas cash flows will be at near-record levels. At $80 per barrel, it would soar towards $1 trillion (on a post-tax, post-capex, pre-financing and dividends basis),” McKay said in the statement.

“Despite this, for many stakeholders and even some chief executives, the sector’s risks outweigh its upsides. This tension will define 2022,” McKay added in the statement.

McKay noted that financing oil and gas was getting harder before COP26 and added that the pressure will ratchet up next year.

“Institutions with over $130 trillion of capital under management have joined the Glasgow Financial Alliance for Net Zero. Watch for the pool of backers to shrink, borrowing costs to increase and project financing for oil to get harder,” he said.

“But lending will not dry up immediately. And gas – especially where aligned with coal retirement or CCS – will be spared the worst,” McKay added.

Fitch Solutions Country Risk & Industry Research provides in-depth coverage of 200 markets and 22 industries, its website notes. Wood Mackenzie describes itself as a global research and consultancy business powering the natural resources industry.

Read the latest issue of the OGV Energy magazine HERE

Published: 15-12-2021

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