Energy Security and Policy to Remain Key Risks
to Markets
2023 to Only Be the End of the Beginning of
Commodity Market Rebalancing
NEW
YORK and LONDON,
Dec. 12,
2022 /PRNewswire/ -- Analysts at S&P Global
Commodity Insights, the leading independent provider of
information, data, analysis, benchmark prices and workflow
solutions for the commodities, energy and energy transition
markets, today released the latest 2023 energy outlook.
"China's COVID policy is the
most important fundamental factor for global demand in commodities
and energy in 2023," according to Dan Klein, Head of Energy Pathways, S&P
Global Commodity Insights, "as its demand softness due to
lockdowns in 2022 was a key safety valve for oil, gas, and coal
markets, while Europe scrambled to
replace Russian energy. With another year of vaccinations and
growing frustrations with lockdowns domestically in China, restrictions will likely ease somewhat
in 2023 and imports of fossil fuels can be expected to increase
again."
The S&P Global Commodity Insights Energy Outlook 2023
presumes China's total energy
demand will increase by 3.3 million barrels of oil equivalent per
day, up from virtually no growth in 2022. This will represent 47%
of global energy demand growth next year. While China's imports will likely return to growth a
growth pathway, India has been a
strong demand performer over the past year, with imports of oil and
coal notably higher year-on-year, as it has absorbed significant
volumes or Russian supply that would have gone to Europe.
OVERVIEW
The incredible rollercoaster ride that energy markets have been
on since the onset of the COVID-19 pandemic in 2019/2020 has been
extended, with unprecedented uncertainty on global energy supply
developing over the past year in the wake of the Russian invasion
of Ukraine, amid a backdrop of a
weaker macro economy and high inflation. In 2023, S&P
Global Commodity Insights expects that markets will be on an
extended pathway of recalibration as supply and demand fundamentals
adjust to elevated prices and supply uncertainty. Barring a
significantly deeper recession than expected, it will take several
years of stronger supply growth than demand growth for inventory
cushions to return to comfortable levels, particularly if Russian
energy export reductions are more severe than anticipated. For oil,
while global supply will increase, it will grow slower in 2023 at
around 1.7 million barrels per day (b/d) than the 4.5 million b/d
growth in 2022, due to greater losses from Russia and limited upside from OPEC. While
there has been a growing narrative that the US shale revolution is
over, we expect 0.7 million b/d of oil supply growth from US shale
alone, with additional growth in crude production coming from
Norway, Brazil, Canada, and Guyana.
For natural gas, global supply growth, particularly liquefied
natural gas (LNG), will be limited in 2023 despite extremely high
prices, due to a lack of new liquefaction facilities coming online.
This will require LNG markets to balance again on demand
destruction rather than supply growth. This dynamic will be
particularly apparent in Europe,
where there will be even less Russian gas supply in 2023 than in
2022, requiring considerable demand destruction.
In general, commodity prices are expected to ease over 2023, as
fundamentals pull toward recalibration. Natural gas, coal, and
crude oil prices are all expected to be lower in 2023 than 2022 on
average. However, while the "platinum age" of refining will
ultimately come to an end, 2023 should still be golden for
refiners, with refined products prices maintaining lofty levels.
Electricity prices are also poised to deflate, with another tranche
of renewables becoming operational and European policymakers
looking to weaken the link between natural gas and power prices.
Once again, demand for all fossil fuels will increase in 2023,
which points to a global CO2 emissions rise despite continued
attention paid to climate and the energy transition. The
environment created by prevailing geopolitical uncertainty, weaker
macroeconomic growth, and high inflation will keep the energy
security versus energy transition debate front and center. While
there have been commodity crises driven by supply disruptions in
the past, the world is dealing with the first truly global energy
crisis across all fuels. The market will adjust with fuel
substitution and altered trade flows, requiring a holistic global
perspective across the breadth of the energy market.
TOP TEN KEY THEMES TO THE 2023 ENERGY OUTLOOK: S&P GLOBAL
COMMODITY INSIGHTS:
- China's COVID policy is the
most important fundamental factor for energy
markets. China's COVID-related restrictions which led to
underperforming energy demand growth, and weaker Chinese energy
imports was a key safety valve for oil, gas, and coal markets in
2022. Were it not for this demand weakness, prices of all
commodities would have undoubtedly been higher, as energy supply
not absorbed by China shifted to
other areas, highlighted by LNG supply shifting to Europe. While China's imports of crude oil (-0.2 million
b/d, -2.0%), LNG (-58 million cubic meters (cu m) -19.7%), and
thermal coal (-45 million metric tons (mt), -17.2%) are all on
track to contract in 2022, we expect them all to return to growth
in 2023. Rising unrest and public protests over COVID policies
support this view. If China's
energy demand and imports are strong in 2023, commodity prices will
be well supported, but another year of subdued demand from
China would be a significantly
bearish development for virtually all commodity prices.
- India will have its say as
well. With China somewhat on
the sidelines in 2022, India's
energy demand proved to be one of the greatest areas of strength.
While India's LNG imports will
decline year-on-year over 2022, its oil demand will increase by
just shy of 0.3 million barrels per day (b/d), with only
the United States growing by a
larger amount. India's imports of
thermal coal increased by most of any country in the world in 2022
by far (+15 million mt). India has
proved to be a key source of demand for Russian energy that would
have ordinarily gone to Europe in
2022, and this dynamic becomes even more important as European
sanctions on oil tighten, although there are significant questions
if India will be willing or able
to absorb even more Russian supply.
- The recalibration of energy markets will outlast 2023.
Global energy markets have been battered with a pandemic, an uneven
recovery, swings in OPEC policy and record uncertainty around
energy supply in response to the Russian invasion of Ukraine. Even before 2022 began, global
inventories were strained due to a stronger recovery in demand than
supply from COVID, with several markets requiring demand
destruction to balance. Even if commodity supply/demand balances
loosen more than expected in the coming year, almost all markets
will require another year or more of recalibration before
inventories, balances, and prices return to a more sustainable
equilibrium. Even in agricultural commodities, where new planting
seasons usually offer new beginnings, several planting seasons will
be required to recover from the Ukraine/Russia losses.
- The reports of US shale's demise are greatly
exaggerated. There is a growing narrative in the market that
"the shale revolution is dead". While growth in shale has and will
continue to be more controlled than in recent years, US shale
production, including natural gas liquids (NGLs), is on track to
increase by more than 1.0 million b/d in 2022 and another 1.4
million b/d in 2023, representing one of the largest components of
global supply growth in both years. Shale oil price breakevens
(less than $50 per barrel) remain on
the low end of the global supply curve, and ~90% of the 180 billion
barrels of technically-recoverable oil is yet to be developed.
After a sluggish start to the year, US natural gas production has
increased by 3 billion cubic feet per day (Bcf/d) in 2022, and
another 3 Bcf/d of growth is expected in 2023.
- The "Platinum Age" of refining will ultimately come to an
end, but 2023 should still be golden for
refiners. Refining margins in 2022 were the strongest ever
on a sustained basis, driven particularly by middle distillate
strength. This requires a new moniker for describing this period,
and we have dubbed it the "platinum age". While some refining
cracks will weaken over 2023 due to slower demand growth and new
refinery startups, diesel cracks are expected to stay much stronger
than historical averages in 2023. And gasoline cracks are expected
to strengthen sharply for the second quarter. Furthermore, there is
also upside to margins due to low middle distillate inventories and
the potential for larger reductions of Russian diesel exports than
currently assumed. Overall, refining margins are expected to remain
strong for 2023. The capacity driven, cyclical petrochemicals
downturn will last at least through 2023, depending on the pace of
capacity rationalization. There will be nowhere to hide in the
global petrochemicals market during 2023, noted Robert Stier, Sr
Lead, Global Petrochemicals, S&P Global Commodity Insights;
All value chains (olefins, aromatics, and polymers) will continue
to be under severe margin pressure.
- European gas and power markets may be even tighter in
2023. European consumers and policymakers achieved a herculean
feat in 2022 by building up natural gas storage to near capacity
ahead of winter, with an armada of LNG vessels still waiting to
unload supply via the Continent's expanded regasification capacity.
Despite this exemplary performance, the encore in 2023 may be more
challenging as Europe will have to
deal with a full year's worth of virtually no Russian gas, and only
a small increase in global LNG supply. European gas will need to
balance on demand destruction rather than growth in available
supply. Additionally, European buyers should not count on a
recurrence of weak Asian LNG and mild temperatures in
late-autumn/early-winter to facilitate storage builds. With natural
gas prices expected to remain elevated, structural reform of
Europe's electricity markets to
weaken the link between gas and power prices is high on the agenda
for 2023, although there will be significant challenges to
achieving such measures.
- Energy security/affordability and energy transition
decisions to become even more difficult and complex. 2022
was marked by difficult choices in response to the Russian invasion
of Ukraine. Some nations loosened
restrictions on the operation of coal-fired power plants, while
others extended the lives of coal and nuclear power plants that
were planned to retire. However, demand destruction from high
prices across a variety of sectors and continued renewables
generation growth limited emissions. With several economies
expected to be in a recession in 2023 and fiscal budgets stretched,
policymakers will be looking to keep energy prices low, perhaps
sacrificing progress on the energy transition. While high fossil
fuel prices may accelerate some consumers' plans to switch to an
electric vehicle or install rooftop solar, the drain of household
wealth from high inflation will limit consumers' ability to lay out
the higher upfront capital for these green technologies even if
they are less expensive that fossil fuels over the lifetime of the
asset.
- The importance of international climate agreements and the
annual COPs for driving energy transition will be tested.
Amidst concerns around energy security, economic growth,
and geopolitical tensions, COP27 in
Egypt featured a general lack of
increased ambition on reducing emissions. While COP27 did lead to a global agreement featuring
historic language on loss and damage, establishing a fund for the
costs of climate change for the most vulnerable emerging and
developing economies, relatively little was agreed to address the
emissions driving climate change. To be sure, progress on the
energy transition has been made over the past year through domestic
industrial policies, bilateral agreements, and ties among smaller
groups of stakeholders – efforts such as the Five-Year Plan in
China, Fit for 55 in the EU, the
Inflation Reduction Act in the U.S., and Just Energy Transition
Partnerships. More targeted forums such as the G20 – led by
India in this coming year - are
increasingly providing platforms for impactful decisions.
- The drivers of energy supply shift more toward policy over
economics, increasing volatility. The importance of policy on
energy supply was on full display in 2022, headlined by the policy
responses to the Russian invasion, the swinging probabilities of an
Iran nuclear deal, recent
loosening of some sanctions on Venezuela, and OPEC's production quota
policies. A clear example of how important supply policy will be in
2023 is how effective the price cap on Russian supply will be.
While forecasting markets based on the economics of supply and
demand can be difficult, predicting what policymakers will do is
next to impossible. Even energy producers situated in countries
with limited or more predictable governmental policies will be
affected by policies, such ESG pressures from shareholders, net
zero commitments, and carbon border adjustment
mechanisms.
- Inefficiencies in global trade will continue to support
freight rates and delivered prices. The emergence of new
trading patterns in response to the Russian invasion of
Ukraine has led to greater
inefficiencies in the shipping sector. Specifically, Europe's source diversification for oil, and
the need to send Russian oil to Asia has led to increased ton-mile demand and
consequently clean and dirty tanker freight rates. Additionally,
the efforts to supply Europe with
enough gas for the winter created a notable increase in the use of
floating storage of LNG tankers. These conditions are expected to
persist and perhaps intensify in 2023, which should keep freight
rates elevated, and keep delivered prices supported.
EUROPE AND NATURAL GAS
"European suppliers achieved a herculean feat in 2022 by
building up natural gas storage to near capacity ahead of winter,"
said Michael Stoppard, Global Gas
Strategy Lead and Special Advisor, S&P Global Commodity
Insights. "Round Two' in 2023 may be more challenging as
Europe will have to deal for the
first time with a full year's worth of minimal Russian pipeline
gas, and only a small increase in global LNG supply. European
gas will need to balance on reduced demand rather than growth in
available supply. Additionally, in a global gas system without any
slack, European buyers cannot count on a recurrence of weak Asian
LNG and mild temperatures."
Media Contacts
Global/EMEA: Paul Sandell, +
44 (0)7816 180039, paul.sandell@spglobal.com
Americas: Kathleen Tanzy, +1
917-331-4607, kathleen.tanzy@spglobal.com
Asia/EMEA: Melissa
Tan, +65-6597-6241, melissa.tan@spglobal.com
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