Fitch Ratings has marginally increased its 2023 gas price assumptions for European TTF, reflecting year-to-date (YTD) prices. We have reduced our 2023-2024 Henry Hub assumptions due to increasing gas production, above-average storage levels and a likely mild winter in the US and Europe. All oil price assumptions remain unchanged.
The small increase in the 2023 TTF price assumption reflects higher-than-expected YTD prices. We still view supply to be sufficient to balance the market. EU gas storage utilisation reached 90% by mid-August, 2.5 months ahead of the set deadline, and is increasing. Ukraine has made available its storage facilities for gas intended for Europe (adding 4% to the EU’s storage capacity this winter).
A reduction in European gas demand, which helps maintain market balance in the region, was sustained in 1H23 (demand declined by 11% yoy and by 21% compared to 1H21) and we expect it to continue in 2H23. LNG remains the main replacement of Russian pipeline supplies to Europe with the EU still adding import capacity.
Gas workers’ strikes at Chevron’s Gorgon and Wheatstone facilities in Australia, which represent about 7% of global LNG supply, could have a temporary impact on European gas prices as Asian buyers of Australian gas could turn to other LNG suppliers, competing with Europe, for the duration of strikes.
The reduced Henry Hub gas price assumptions for 2023 and 2024 reflect growing gas production in the US due to increased drilling activity in 2022. Production still outstrips domestic gas demand, although the gap has narrowed. A decline in the natural gas rig count to 115 in August from 160 a year ago will eventually lead to lower production, although with some time lag. The mild temperatures that we expect in the US and Europe this winter will affect near-term demand.
We have kept our oil price assumptions unchanged. Despite recent market tightening and increased spot prices, we anticipate average prices for 2023 to remain in line with our current assumptions. The market is in backwardation with three-year forward contracts trading at about USD76/bbl, or USD16/bbl below spot prices.
We expect the oil market deficit in 2H23 to be mostly driven by Saudi Arabia’s additional production cuts and increased demand. However, Russian production levels remain fairly resilient, while production is growing in the US, Brazil and Iran. The IEA expects oil demand to remain robust, but growth rates to decelerate: 4Q23 demand will increase by 2.3 million barrels per day (MMbpd) yoy, with about 70% of this growth coming from China, with a further increase of 1.2MMbpd in 4Q24 yoy.
There is sufficient spare oil production capacity of about 5MMbpd, which can be relatively easily brought back online, should OPEC countries decide to do so. Saudi Arabia has spare capacity of 3MMbpd, in addition to the UAE’s 1.5MMbpd and Kuwait’s 0.3MMbpd.
Source: Fitch Ratings