This year, energy markets experienced significant volatility due to both global catalysts and shifting investment trends. Russia’s invasion of Ukraine in February, coupled with European gas pipeline outages, ushered in a period of higher demand for LNG cargoes and near-$10 Henry Hub, which was also exacerbated by slow U.S. supply growth. In oil markets, guidance from OPEC and the West’s shunning of Russian barrels increased uncertainly around global supply and launched WTI over $120/bbl in June. And lastly, earnings reports through the first two quarters of the year saw producers continuously prioritize shareholder returns over investment in production growth, and though 3Q earnings saw this trend continue, guidance for inflation grew sizably as well. In this Energy Market Insight, BTU Analytics looks at these and other events that have significantly affected the oil and gas industry in 2022.
Natural Gas Prices Soar
In early February, BTU Analytics wrote about how Russia’s invasion of Ukraine had introduced a new source of volatility to Henry Hub & global gas pricing. However, due to uncertainty over how long the war would last, how much incremental LNG demand would come online, and what the ‘21/’22 Winter and ‘22 Summer temperatures would look like, it appeared that Henry Hub pricing was primed for downside risk. Of course, that changed as the Russian invasion stretched on far longer than the market had originally anticipated. Driven by a combination of massive reductions of Russian natural gas exports to Europe, the resulting high competition for LNG cargoes, infrastructure constraints (chief among them being the ongoing Freeport outage and the sabotage of Nord Stream 1 & 2), and abnormally high summer temperatures, Henry Hub pricing sustained far above $6/MMBtu for most of the summer.
Oil in Short Supply
Of course, natural gas pricing wasn’t the only aspect of energy markets that caught BTU Analytics’ attention this year. Beyond the U.S., sanctions against Russia, the recent European shun of Russian oil (and soon to be refined products), and a years-long underinvestment in more capital-intensive global supply helped push WTI over $100/bbl in March as global demand continued its rapid recovery from pandemic-related declines. Supply chain constraints on labor, steel, frac sand, and other materials limited rapid investment in supply. Instead, U.S. producers continued to focus on investor returns and, as a result, U.S. oil production growth lagged. It is due to these drivers, OPEC+ production cuts, and a rapid demand response following Covid-19 that the global oil market was left undersupplied for much of this year, even despite the resiliency in Russian liquids production compared to initial estimates of significant supply disruption.
Year-End Guidance & Inflation
Another aspect of producer behavior that BTU Analytics has seen this year, aside from the continued commitment to prioritize shareholder returns over investment in production growth, is producers’ accounting for inflation. As BTU Analytics detailed in a March Energy Market Insight, costs in the well completions market had already been on the rise, and 2022 was no exception. With supply chain constraints and the near-full utilization of frac crews, many E&Ps guided in 3Q22 earnings an expectation for costs to rise even further in 2023 due to inflation, this time by 10–20%.
In short, 2022 was an eventful year for energy markets. BTU Analytics devoted numerous Insights and Outlooks to navigating the volatility surrounding oil and gas pricing, production, and supply and demand balances. For samples of these reports, please email firstname.lastname@example.org. Also, be sure to check back in on January 5th as we release a special Energy Market Insight that details BTU’s 2023 Oil & Gas Preview!