Although oil and European gas prices have decreased from their peaks in early 2022 and the recent relief in gas supply issues, there is still concern about the demand that is putting a damper on oil sentiment. In 2023, it is expected that the markets will tighten once more, leading to a subsequent increase in prices.
Oil Outlook: Russia’s oil production is expected to decrease
Despite the ban on Russian exports and increased self-sanctioning, the Russian supply has held up better than expected due to increased demand from India, China, and other smaller buyers taking advantage of the discounted prices. The ban the EU imposed on Russian crude oil is still having an impact, and its effects won’t be known until early February 2023, when the ban on Russian refined products takes effect. It is likely that India and China’s capacity to take in a greater quantity of Russian oil is restricted. The evolution of the Russia/Ukraine conflict will be a critical factor in determining the state of oil markets in 2023.
Oil demand is weaker than expected
At the start of 2022, expectations were that global oil demand would reach the levels seen before the Covid pandemic. However, due to high energy prices, a less optimistic macroeconomic outlook, and China’s zero-Covid policy, demand is anticipated to increase only modestly in 2023 and remain below pre-Covid levels even as demand continues to grow.
Tighter oil market in 2023
OPEC+ has chosen to ignore efforts to raise oil supplies, which has been met with criticism, particularly from the US. In the immediate future, this decision appears to be beneficial in maintaining market stability. In the long run however, the supply cuts may be more disruptive due to a predicted deficit in 2023. This could lead to higher oil prices, although the outcome is uncertain due to various geopolitical and economic factors. Europe is in a good position for the upcoming winter season due to decreased demand and mild weather. EU storage levels are above the five-year average and the next few months are expected to be manageable, however Europe must remain cautious in order to end the season with high storage levels and plan for a possible decrease in gas flows in the coming year.
European demand has responded to higher prices
The European Commission has achieved its goal of a 15% reduction in natural gas demand from August to March due to high prices. According to Eurostat data, EU consumption of natural gas in September 2022 was 15% below the five-year average. To ensure that adequate gas supply will be available for the 2023/2024 winter, Europe must maintain reduced demand until 2023. This is especially important considering the potential for further drops in the EU’s Russian gas imports.
Russian natural gas flows remain a risk
Throughout 2022, Russian pipeline gas flows to Europe have dropped significantly. Year-to-Date, flows have decreased by approximately 50% compared to the same period last year. Currently, daily flows are down by 80% YoY. If this trend continues, annual gas flows could decrease to 23bcm in 2023, a 60% decrease from their current level. There is a risk that the remaining gas flows could be completely halted.
Limited LNG supply growth
In 2022, the European Union experienced a dramatic increase in imports of Liquefied Natural Gas (LNG), with volumes exceeding 9bcm — a nearly 70% increase year-over-year. This surge in the LNG market was an enormous benefit to Europe. However, Europe is facing difficulties in importing more LNG due to a lack of regasification capacity. To help with this, the Netherlands, Germany, Finland, and Estonia have added a combined capacity of 23-27bcm with the use of FSRUs. Germany is also expected to add 15bcm of regas capacity in 2023, but this will not be enough to satisfy global LNG supply. The global LNG export capacity was expected to increase significantly in 2023, however due to Russia’s invasion of Ukraine and subsequent sanctions, the total increase could be reduced to 10.5bcm, as Russia makes up 46% of the potential new capacity.
2023 will be tight for European gas
Europe is likely to enter the 2023/24 winter season with a limited inventory of natural gas due to reduced Russian supply and the EU’s inability to turn to other sources for the same. The modest inventory build during the 2023 injection season further increases the vulnerability of Europe to future energy shortages. Europe will need to continue to reduce demand for natural gas in order to make it through the 2023/24 winter comfortably. This can be done through either market forces or EU-mandated cuts. If Russia continues to supply gas, Europe will likely be able to make it through the winter, but it will be much more difficult if Russia stops supplying gas altogether. Europe may experience a more manageable winter in 2023/24 if Russian gas flows continue, yet that outlook could be significantly more challenging were these flows to cease. This could result in a positive effect on European gas prices in 2023. Nonetheless, the outcome may rely on how much storage the European Union can deplete this winter.
The US natural gas market has become more stable
In 2022, the US natural gas market experienced strong growth due to high LNG prices, increased demand from the power sector, and low inventories. However, US dry gas production is projected to reach an all-time high in 2023, resulting in a less optimistic forecast for gas prices. Gas usage increased in 2022 as a result of rising demand from the power industry. However, it is anticipated that domestic demand will return to normal levels. More LNG will be available in 2023, increasing exports from 10.8 billion cubic feet per day in 2022 to an expected average of 12.3 billion cubic feet per day. As a result, the outlook for US natural gas inventories in 2023 is optimistic, with projections pointing to surpassing the five-year average before the winter of 2023/24. In fact, the US may enter the winter of 2023–2024 with its storage levels at their greatest since 2020. As a result, it is anticipated to trade at a lower price in 2023 compared to 2022. Given the current geopolitical climate and the state of the global economy, the accuracy of the gas price forecast is uncertain.