ERCE Energy Review Q4 2021

Status Quo: Electricity costs in Europe are spiking as a result of a global gas shortage, low renewable energy outputs, depleting coal stockpiles and surging EU carbon prices. Media outlets around the world have declared the situation as an "Energy Crisis" as Governments across Europe scramble to put in place measures to protect its industry and households from the rising energy costs. Towards the end of September, Brent oil surpassed US$80/bbl for the first time in three years, as OPEC+ members face difficulties raising their production output. There is also the anticipation of gas-to-oil switching as a result of the surge in natural gas prices.

Short-term: Short-term consensus on oil prices may depend on OPEC+'s ability to ramp up production and the temperatures and length of the winter period. Oil prices are likely to be supported by the surging LNG and coal prices into the winter period. Nigeria and Angola have declared that they would struggle to boost their production until at least into 2022, due to maintenance issues and underinvestment. In September, the Iraqi oil minister mentioned that OPEC+ was working to keep oil price near US$70/bbl, with an expectation that the OPEC+ will stick to its existing production plans if prices stay near that level, despite pressure from the US for more supply.

Medium-term: Medium-term consensus would probably hinge on the balance between the rate of production growth and the pace of the post-Covid economic recovery. The OPEC, EIA and IEA all expect strong demand growth for the rest of 2021 and 2022. Out of the three agencies, OPEC had published the most optimistic forecast, expecting demand to grow by 4.2 mmbpd in 2022. The EIA expects OPEC+ and US tight oil production to outpace demand growth in oil consumption in 2022, expecting oil prices to decline from 2021. There is a possibility of a return of Iranian production in 2022, as negotiations over the Iran Nuclear deal continue.

Long-term: The Long-term consensus remains uncertain, as the energy crisis highlights the difficulties of the energy transition, as soaring energy prices may sway public sentiment against further emissions and climate goals. At the AAPEC conference, CEO of Hess Corp warned about the underinvestment in the industry and its potential impacts on supply in the future. While European majors shift cash to invest in renewable energy, the US majors maintain their focus on its core oil and gas positions, citing poor returns for renewable projects.