Moody’s Investors Service has upgraded its outlook for the global energy industry, citing a sustained increase in commodity prices and expectations for global economic growth to drive increased oil and gas demand over the next 12 to 18 months.
The firm said it expects that, as vaccine programs become prevalent and the coronavirus outbreaks fade, increased travel should drive demand for oil while greater commercial and industrial activity should boost demand for natural gas.
“Pent-up consumer demand and increasing trade and manufacturing activity as the Covid-19 pandemic is brought under control are driving a rebound in global economic activity,” said Elena Nadtotchi, a Moody’s Senior Vice President. “This, in turn, is quickening the pace of a recovery in demand for oil and gas through late 2021 and into early 2022.”
Moody’s raised its outlook for the energy industry to positive from stable and maintained its expectations for 2021 oil and gas prices. It expects average prices of $45-$65/bbl for Brent crude and $2.00-$3.00/MMBtu for Henry Hub natural gas. Both oil and gas are currently priced at the upper end of those ranges.
In a report released last week detailing its outlook, Moody’s said the exploration and production (E&P) sector should make solid gains in earnings and operating cash flow this year, thanks to higher oil prices, favorable physical market conditions and relatively low operating costs. Most scaled back expenses substantially during the pandemic.
Additionally, mounting demand for travel and higher second- and third-quarter earnings in 2021 should support the refining and marketing segment through 2022, Moody’s researchers said, estimating that global demand for refined products will rise by about 6% this year and another 4% in 2022.
The firm said integrated oil companies could see earnings rise by a median rate of about 50% on higher average oil prices and recent gains in operating efficiencies. Of course, the increase is compared to weak year-earlier results, when companies were wrestling with the depths of the pandemic-induced demand destruction.
“Tepid fundamental conditions,” however, “point to a stable direction for the oilfield services and drilling (OFS) sector” through mid- to late 2022 “amid lukewarm growth in demand for services,” Moody’s said.
“The large investment-grade OFS companies will improve cash flow modestly and will gain market share in the recovery, but smaller, regional and service-focused OFS companies that have insufficient liquidity to await a full recovery will likely have to consider bankruptcy filings or liquidation,” researchers added. “Despite the rally in commodity prices, growth in drilling activity, a proxy for OFS demand, remains modest and will likely remain so through 2021.”
On the natural gas front, the U.S. Energy Information Administration (EIA) last month projected that Henry Hub spot prices would average $2.73/MMBtu during the second quarter of 2021 and should average $3.04 for the year. That would mark a spike from the 2020 average of $2.03.
“We expect that continued growth in liquefied natural gas (LNG) exports, with only a slight corresponding increase in dry natural gas production, will contribute to the average Henry Hub spot price rising to $3.11/MMBtu in 2022,” EIA said in its latest Short-Term Energy Outlook.
LNG feed gas volumes were above 11 Bcf/d and near record levels through most of April amid steady demand for U.S. exports from both Europe and Asia.
The Organization of the Petroleum Exporting Countries (OPEC) recently projected that demand for oil would rise by 5.95 million b/d this year. OPEC and its partners, aka OPEC-plus, also agreed to add more than 2 million b/d into the market by July.
The International Energy Agency last month raised its 2021 forecast for global oil consumption by 230,000 b/d to an increase of 5.7 million b/d, citing vaccine momentum.
“With weather getting better and vaccination campaigns accelerating, oil demand is benefiting,” said Rystad Energy analyst Louise Dickson.
Moody’s said global demand for oil was 95 million b/d in March “and will continue to expand to nearly 100 million b/d by the end of 2021, close to the pre-pandemic level of 101 million b/d” at the close of 2019.
“We expect that the OPEC-plus group of producers retains strong consensus and will continue to manage a gradual increase in production in step with the recovery in demand in 2021-22, while U.S. production levels are unlikely to rise significantly before 2022,” the Moody’s analysts said.
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