As the energy sector enters the final quarter of 2022, attention has moved past the concerns of supply shortages and record earnings seen this summer. The focus will move towards next year and recent developments have the industry more concerned about softening demand than keeping enough energy supply available.
Third Bridge experts point to the recent OPEC+ decisions to curtail production aggressively in November as evidence of the demand concerns but this situation is far from clear.
Russia sanctions dominate calculations
Looming over the energy backdrop is Russia on both oil and natural gas. For oil, the key date is December 5, which is when the European ban on Russian crude oil imports goes into effect, and Third Bridge experts fear that could create some challenges. The effectiveness of a price cap is uncertain, but to date, Russian oil volumes have proved to be more durable than originally thought.
On natural gas, European customers have nearly filled storage ahead of the winter (now 91% full), although the inventory drawdown could occur quickly depending on weather and government measures. Third Bridge still sees a difficult winter ahead and governments are intervening to subsidize consumers – a situation that is envisaged persisting for years to come.
What does this mean for energy companies?
This environment likely produces a cautious outlook from the listed energy companies as they report third quarter earnings. Balance sheets have been repaired and are healthy, while spending has been restrained relative to previous cycles. Earnings are unlikely to exceed the record levels of the second quarter of 2022, but they will continue to report robust results.
Capital spending for next year is likely to be higher than the current year, although some supply chain issues continue to constrain the market, particularly in the US. Third Bridge experts see some improvement in the outlook for oilfield services as a result, although the industry remains at a run rate well below prior cycles.
One area to watch is how the companies handle the political climate around capital spending. Earlier this summer, the frustrations on both sides became very public, and while energy prices have eased somewhat since then, nobody is declaring victory that the energy crisis has been solved.
Europe has seen a massive amount of government intervention in its energy markets and the US has become clearly frustrated with OPEC+ just one month ahead of midterm elections. Demand headwinds and public pressure create a tricky time for energy companies to be investing more in the short term, although our experts believe that more investment will be needed in the years ahead.
What about Iran and Venezuela then?
Other factors traders in the oil market will be worth considering: the US has been trying to get both Iran and Venezuela back into the fold, but progress with Iran, a major oil and gas producer, has been painfully slow. There is not much Russia can really offer Venezuela, in contrast to the potential benefits for the Caribbean nation if it can seal some kind of deal with America.
According to a recent proposal seen by the Wall Street Journal, Washington would relax sanctions against Venezuela strongman Nicolás Maduro’s “21st Century Socialist” regime, allowing US oil giant Chevron to do a fresh deal there. In exchange, Maduro, whose repression and economic mismanagement have generated one of the worst refugee crises since 2018, would restart talks with the opposition about holding free and fair presidential elections in 2024.
Venezuela has some of the world’s largest oil reserves, but its once-booming oil industry has been crippled by mismanagement and US sanctions. Output has fallen from close to 3.5 million barrels per day in the late 1990s to barely over 500,000 today.
