Oil and gas price outlook a year after Russia-Ukraine war

Russia, on the supply side, and China, on the demand end, will remain the key uncertainties weighing on oil and gas prices this year.

The Russia-Ukraine war shows no sign of ending. There other factors are China, winter demand this year and the full-year impact of the Nord Stream pipeline disruption, experts say.

The price movement of crude oil and natural gas for the last 12 months suggests a similar sentiment, as prices have cooled off from the July-August 2022 high, after the Russian-Ukraine geopolitical tension started.

“The impact of the war has already been absorbed by the energy market. To my mind, there will be no surprise here as it is assumed it is here to stay for some time,” said Madan Sabnavis, chief economist for Bank of Baroda.

As far as the US Energy Information Administration (EIA) is concerned, Russia’s oil production continues to defy anticipated levels. In its February short-term energy outlook report, EIA revised its outlook both for Chinese demand and Russian supply.

“The revisions result from China relaxing COVID restrictions. This has increased our forecast of the growth in oil demand. At the same time, more oil was produced in Russia than we anticipated during January, and we raised our forecast for Russia’s oil production through the end of 2024,” EIA said in its note.

Nitin Bhasin, Co-Head of Institutional Equities and Head of Research at Ambit Capital, explains that at play are factors such as commercial considerations, especially affordable energy access.

“The Dec-22/Feb-23 EU ban on Russian oil/oil products followed a correction in oil prices and gross refinery margins (GRMs). The supply disruption fallout of the Russia-Ukraine war was short-lived. Commercial considerations, especially affordable energy access, outweighed morality,” he said.

Russia has been able to defy lower supply projections through increased sales to countries such as India and China through discounted prices.

The China factor

Probal Sen, Energy Analyst from ICICI Securities, points out that some impact of the Russian side of supply disruption was cushioned with lower Chinese demand last year.

“In the last year, at the peak of the conflict, Chinese demand for oil and gas was much lower than the historic levels due to COVID-19 levels. That is now changing. To what extent these changes (increase in Chinese demand) will be one driver of price,” Sen pointed out.

Sabnavis agrees while the war is factored in, China will remain an uncertainty. “The risk factor is Chinese demand, as when China recovers, everything happens in a big way and this can affect fuel prices once more. Still, I think it won't be that destabilising as the world is moving steadily to green energy and e-vehicles,” he said.

Winter and Nord Stream

A major factor contributing to the current softening in gas prices was a milder-than- expected winter. This, analysts point out, may or may remain an enabling factor this year. “European winter has been much milder. This may not persist in the next year. Winter could return to normal levels in the next year, and, therefore, the gas requirement can go up in Europe,” Sen from ICICI Securities said.

Sen also pointed out that 2023 is the year that will witness the full impact of the Nord Stream disruption. The Nord Stream gas pipeline was sabotaged in September. “Till the Nord Stream pipeline was blown up, the flow of Russian gas to Europe was still at some reasonable levels. The flow of gas can substantially drop this year,” he said.

Price outlook 2023

Sen from ICICI Securities expects crude oil prices to remain in a narrow range of $85-$90 per barrel, as price disruptions have been relatively less. Others, like Bhasin from Ambit Capital, echo a similar view. He expects, hereon, prices should behave as in normal circumstances (no war impact), except for the additional transportation charges for shifts in trade routes.

For natural gas, the EIA forecasts that the Henry Hub natural gas spot price will average $3.40 per metric million British thermal unit (MMBtu) in 2023, down almost 50 percent from last year and about 30 percent from their January Short-Term Energy Outlook (STEO) forecast.

S&P Global Ratings’ European gas price expectation for the rest of the year is $30 per MMBtu, from the earlier expectation of $40.

According to a poll conducted by Moneycontrol in December 2022 (give link), energy experts said some upward pressure on the price of crude oil is expected by March 2023. In a survey of 14 energy experts from brokerages and rating agencies, five experts said crude oil prices would range between $80 and $90 per barrel and the same number of experts predicted it would range between $90 and $100 per barrel by March 2023.