Market

Three top energy themes for 2022

One thing to start:

  • Protests have erupted in energy rich Kazakhstan, in part over rising fuel prices. More on what’s at stake for global oil and gas markets in today’s Data Drill below.

Welcome to the first Energy Source of 2022.

Today we take a look at the big questions for the year ahead.

Is $100 oil on its way? Can Europe avoid a fresh spike in natural gas prices this winter? The US oil sector looks set for a boom year under President Joe Biden — it could be the largest oil producer and liquefied natural gas exporter in 2022. Finally, can governments around the world turn last year’s flurry of international climate diplomacy into durable domestic policies and start to bring carbon emissions down?

Let us know what you think the answers to these questions will be and what you expect to be the big themes for 2022.

Thanks for reading.

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Three big questions in energy for 2022

1. Can energy inflation be tamed?

Oil’s surge last year saw the return of the $100 a barrel oil price forecast — a tried and true way for Wall Street analysts to grab their clients’ (and our) attention. Will it come to fruition in 2022?

Some of Wall Street’s blue-chip analysts think so. Francisco Blanch, Bank of America’s head of commodities research, says prices could spike as high as $120/b in the first half of the year as crude demand continues to race ahead of supply. Goldman Sachs, which has argued the market is in the early stages of a supercycle, is also among those predicting that triple-digit oil is in the cards for 2022.

The forecasts hinge on a couple of key factors playing out this year. First is the global economic recovery continuing at a healthy clip. This would help pull crude consumption back up to pre-pandemic levels of around 100m barrels a day.

At the same time, oil bulls expect the supply recovery to continue to lag behind demand, fuelling the higher prices. They argue that not enough is being spent around the world to rebuild oil production capacity, America’s shale industry is in a new low-growth era, and OPEC+ will not — or cannot — bring on enough output to cover the gap.

The bull case is no sure thing, but surging global crude prices would cause economic and political shockwaves.

The global economic recovery, already beset by high inflation, would struggle to withstand $100 oil for long and soaring fuel prices would threaten further political instability (of the sort seen in Kazakhstan this week) in a world already set on edge by the continuing pandemic.

Meanwhile, Europe faces an uncertain winter as natural gas prices have surged and stores of the fuel plunged. A cold snap on the continent could bring big bills to European consumers and gas providers. Europe’s gas shortages will also feed a tense showdown between Russia and western nations over Ukraine.

2. Can US oil and gas boom again under Biden?

Joe Biden has promised a long-term transition away from fossil fuels, but he is likely to oversee a booming domestic oil and gas industry in his second year in office. America’s fossil fuel producers are set up for a banner year of bumper earnings and growing output.

The country’s shale producers look to have finally landed on a profitable formula: limited output growth, tight control over spending and a focus on dividends and share buybacks. If oil and natural gas prices remain elevated, analysts are predicting a gush of cash from the shale sector. That is, if they stick to the plan. After a decade of cash-burning growth, the industry has not yet shaken off its reputation for profligacy.

Still, there is likely to be substantial growth from America’s shale patch. The country’s oil output is forecast to be around 12.2m barrels a day by December 2022, up 600,000 b/d from the start of the year, according to the Energy Information Administration. It would firmly install the US as the world’s largest oil producer after output collapsed during 2020’s pandemic-driven downturn.

The US is also set to become the world’s largest exporter of liquefied natural gas in 2022 — at least in terms of capacity — surpassing both Qatar and Australia. Strong demand for the fuel, especially from China, has put a tailwind behind a new wave of export facilities and expansions to existing projects.

3. Can the world stop the rise in carbon emissions?

Climate will remain at the heart of policymaking efforts this year as world leaders seek to make good on pledges to “build back better” after the pandemic and urgently stem the rise in global temperatures.

But politics will continue to dog green efforts, as the underwhelming outcomes of the COP26 climate talks in Glasgow last year laid bare.

Countries are being encouraged to increase the ambition of their emissions pledges ahead of COP27 in Egypt this November — though as things stand they are struggling to put substance behind their current commitments.

In the US, Democrats will look to resuscitate Biden’s sweeping $1.75tn spending bill, which would have made a record $555bn investment in climate and provided huge tax incentives for renewables. The legislation hit a wall last month when Senator Joe Manchin, a pivotal swing vote, said he would not back it. The West Virginia moderate offered some hope to progressives on Tuesday, however, by suggesting a compromise on the bill’s climate provisions was possible. “The climate thing is one that we probably can come to an agreement much easier than anything else,” he said.

The spending bill plays a big role in how Biden intends to deliver on his pledge to cut emissions in half by the end of the decade against 2005 levels. Passing the legislation will only become more crucial if the US Supreme Court curtails regulators’ ability to clamp down on greenhouse gases later this year, as expected by many court watchers.

In Europe, Brussels is also pushing to cut emissions through its Green Deal plan. But the divisions within the EU over how to get there were made clear this week as member states clashed over which forms of energy could be classified as green — and therefore benefit from the billions of euros in investment that will be pumped into decarbonising the bloc’s economy.

And whatever the progress made in the west, much will ultimately hinge on China’s ability to unlock the roughly $6.5tn needed over the next four decades to reach carbon neutrality by 2060.

All of this means the aspiration of the Paris agreement to limit warming to 1.5C will be remain an uphill battle. (Justin Jacobs and Myles McCormick)

Data Drill

Protests over rising fuel prices have sent Kazakhstan into political upheaval. Demonstrations continued for a fourth day yesterday as President Kassym-Jomart Tokayev accepted the resignation of the government and declared a state of emergency in many cities. Movement restrictions and internet blackouts have also been implemented.

Energy markets will be watching developments in the central Asian nation closely.

Kazakhstan, part of the OPEC+ alliance, is a leading oil producer, pumping around 1.7m barrels a day of crude, roughly the same as Norway and Nigeria. A sustained disruption to Kazakhstan’s supply could send global oil prices higher.

So far, the protests have not hit oil and gas output. A spokesperson for Chevron, which operates Kazakhstan’s largest oilfield, the Tengiz, told ES that workers had gathered in support of the protests, but that production and work on expanding the field had not been disrupted either.

Other western oil majors, including ExxonMobil, Shell, Total and Eni, also have large investments in the former Soviet republic.

Further complicating matters is that the country is a big gas supplier to China, via the Central Asia-China gas pipeline. Any disruption there could force China to pull from other suppliers in an already stretched global natural gas supply chain (Amanda Chu)

Bar chart of  showing Kazakhstan was among the top petroleum producers in 2020

Power Points

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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