In 2022, numerous economic factors and geopolitical events rattled markets in almost every sector from mortgages and food to manufacturing to health care. Energy commodities were obviously not immune to the destabilizing impacts of inflation, war, and the lingering effects of a years-long global health crisis. As we look forward into 2023 and beyond, GLJ analysis finds that while the impacts of these scenarios have had negative impacts on price forecasts, markets have by-in-large adjusted for them at this point. With these variables “baked-in,” pricing forecasts become more stable and robust.
The Henry Hub price has, and will continue, to reflect the impacts of a warmer-than-expected winter heating season that North America continues to experience along with a continued lack of positioning by the U.S. government on the potential rebuilding of the Strategic Petroleum Reserve (drawn down throughout 2022 in efforts to curtail the sharp rise in fuel prices in the United States). Russian crude appears to have found new markets offsetting supply constraints from other production regions.
The European gas crisis expected this winter resulting from a Russian supply cut has been managed and mitigated with the market accessing supply from other suppliers and has led to greater price stability. The generally milder-than-expected winter weather in Europe and North America and relatively large storage volumes have served to moderate the expected price spikes predicted even just a few months ago.
The big story continues to be the price differential between Western Canadian Select (WCS) and West Texas Intermediate (WTI). GLJ continues to see a wide split between the two over the next two-year period with a gradual reduction in the differential moving closer to our longer-term forecast in year three. Take-away capacity restrictions in Canada from a Keystone Pipeline shutdown, Russian heavy oil redirection to alternate markets, and the movement of Venezuelan heavy production all contribute to price pressure on WCS. Tankers have already started moving Venezuelan crude to the USA and Chevron has openly mused about the reactivation of thousands of wells in the country. As key competitor to WCS, an increase of even 100 or 200 MSTB/D would likely have a significant impact on North American markets.
The coming-on-stream of TransMountain and the potential for the US to begin to rebuild its Strategic Petroleum Reserve will serve to lower the price differential, however, the US has not made any announcement on the issue and TransMountain is unlikely to start up until 2024. GLJ feels that these mitigating factors will not have any impact on the price differential for at least the next two years.
Inflation and Exchange Rates
As evaluators working on year-end 2022 reserves, GLJ has observed the inflationary impact on our clients from the end of 2021 through until recently. We have seen capital and operating cost (CapEx/OpEx) increases ranging from lows of about 10%, but increases of 20% and even above 30% year-over-year in regional activity across the WCSB have been more common. The run up started in late 2021 and continued into Q1/Q2 of 2022. This has closely tracked the rise in commodities over that same period, with a more recent plateau observed in the second half of 2022, again tracking commodities. This has brought up the question of how to manage these increased inflation expectations going into 2023.
GLJ will be using a fairly traditional inflation forecast of 2% per year to reflect the expected increase in CapEx and OpEx expenses going forward from Jan 1, 2023. We believe that the large increases observed in the field was a leading indicator and the impact of those increases has now been worked into the market. So, while we do expect a much higher consumer price index (CPI) inflation, we do not forecast this on CapEx and OpEx.
There have been no significant changes in exchange rates. As we stated in our last pricing blog in October 2022, the US dollar has weakened modestly against other currencies.
January 2023 Price Forecast
GLJ has released our latest evaluator commodity price forecast effective Jan 1, 2023, reflecting the current sentiment seen throughout energy markets. Our oil forecast has WTI set at $75.00 USD/bbl for 2023 and a long-term real price of $72.50/bbl (in 2023 dollars) with the Edmonton Light crude price at CAD $97.96 for 2023. Our gas forecast has been adjusted to reflect current market trends in the short-term, while stabilizing in the longer-term at $4.10 USD/MMBtu (real) and $4.18 CAD/MMBtu in real dollars for Henry Hub and AECO, respectively.
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