S&P: Russia-Ukraine conflict remains biggest risk to oil & gas prices

Standard & Poor`s Global Ratings has raised the price assumptions for Brent crude from $75 to $85, WTI – from $70 to $80 in 2022, Report informs referring to the S&P website.

Brent oil price forecast for 2023 has been revised from $65 to $70, WTI - from $60 to $65. For 2024, oil prices remained unchanged at $55 and $50, respectively.

The rating agency reminded that crude oil prices spiked as news broke that Russia had invaded Ukraine on the morning of February 24, with Brent and WTI both surpassing $100 per barrel (/bbl) intraday to reach their highest levels since 2014. Ultimately, prices settled up only modestly for the day, finding relief in comments made by US President Biden and other world leaders that the fresh round of sanctions being levied on Russia would not include oil and gas exports.

“While in our view, the Russia-Ukraine conflict remains the biggest risk to oil and gas prices, we believe underlying global supply and demand fundamentals have strengthened in recent months and will support higher near-term prices regardless. However, conflict-related interruptions to Russian oil and gas exports, whether from sanctions, cyber-attacks on infrastructure, or Russia withholding volumes, could result in further price spikes and we expect significant near-term price volatility as the conflict evolves,” the agency noted.

As the Russia-Ukraine situation evolves, S&P will continue to evaluate the impact on commodity price assumptions and the credit ratings of companies in the oil and gas sector: “World leaders have so far made clear that they want to avoid sanctions on Russian oil and gas exports, given the collateral damage this would cause to economies outside of Russia, particularly in the EU countries that rely heavily on Russian supplies for both oil and gas. The EU imports about 25% of its oil and more than 40% of its gas from Russia. The removal of Russian oil and gas volumes from the market would likely send energy prices soaring, exacerbate already-high inflation, and slow economic growth globally, a move that would be detrimental to many nations outside of Russia. Although increased liquefied natural gas (LNG) exports to Europe from the US in recent years have softened Russia's grip on the European gas markets, it would take years to build out new infrastructure to offset the dependence on Russian gas.”

S&P reminded that governments around the globe, including in the US, EU, UK, Japan, and Australia, have announced wide-ranging sanctions on Russia that target its largest banks, state-owned entities, and high-profile individuals including oligarchs and most recently Vladimir Putin: “Many have also placed export blocks on technology and other supplies to Russia, and most recently banned Russia's access to the SWIFT international payment system. Germany suspended the certification of the Nord Stream 2 gas pipeline, which the US has also placed sanctions on, although we do not expect this to affect near-term gas imports.”

According to the Energy Information Administration (EIA), Russia was the world's third-largest producer of oil and the second-largest producer of natural gas in 2020, giving it an outsized influence on global energy markets. The International Energy Agency (IEA) has stated that its members, including the US, have the ability to make a coordinated release of oil volumes from strategic petroleum reserves (SPR) to provide some relief to prices. According to the IEA, member countries had about 4.16 billion barrels of oil reserves at year-end 2021, including 1.5 billion barrels designated as emergency reserves.

In addition, President Biden has reiterated his call on US-based oil and gas producers to increase supplies to the market and not seek to simply capitalize on the higher prices. Pressure is also being stepped up on countries like Saudi Arabia to bring additional volumes to the market, given its spare capacity and ability to ramp up production relatively quickly. However, Saudi Arabia, along with the rest of OPEC, has been working closely with Russia in recent years to coordinate a measured return of volumes to the market, a relationship that we believe could complicate its ability to easily break with existing quota agreements and disassociate with Russia.

Finally, a resolution of the Iranian nuclear deal negotiations, which both sides have signaled are progressing towards reaching an agreement, could bring some up to 1.5 million bbl/d of additional export barrels to the market by late 2022.