Fitch Offers Conservative Price Outlook for Oil and Gas

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Discussion and debate over future price outlooks for crude oil and natural gas are a staple of many energy conferences, and this week's "EnerCom Denver: The Energy Investment Conference," was no exception. And when discussing future outlooks, one is reminded of Yogi Berra's famous quip, "It's tough to make predictions, especially about the future."

Even so, the price outlook shared August 8 by speakers from Fitch Ratings (New York, New York), a unit of Hearst Communications Incorporated (New York), had more than a few conference attendees scratching their heads. The conference is sponsored by EnerCom Incorporated (Denver, Colorado), and has more than 1,000 registrants.

Speakers from oil and gas organizations at the Denver conference said they saw a "tight" supply-demand fundamentals market, meaning supply and demand were closely aligned. A "tight" market suggests that future prices would be relatively flat. If future demand exceeds supply, prices rise, but if supply grows faster than demand, prices generally soften.

Analysts from Fitch who spoke at the conference provided a much more conservative price outlook for oil and natural gas.

Neil Stirrat, a director, said Fitch expects "oil prices will stay high, at least in the short-to-medium term, because of geopolitical tensions and improving demand."

But looking farther into the future, Stirrat said the firm's "base case" was that crude oil and natural gas prices would fall sharply over the 2023-2025 period. He and a colleague, Lucas Aristizabal, emphasized that their "base case" was for the purpose of corporate capital allocation. It was not a projection.

Whatever Fitch called it, it was dramatically different from other voices in the market.

For the purposes of oil and gas producers trying to make capital-spending decisions, Fitch saw Brent crude oil prices averaging $105 per barrel in 2022, $85 in 2023 and $53 in 2025. In the ratings agency's capital allocation base case, West Texas Intermediate (WTI) crude, the U.S. benchmark, fell from an average of $100 per barrel in 2022 to $50 in 2025.

Click on the image at right to see Fitch's price outlook for crude oil.

That sharply contrasted with price projection from the U.S. Energy Information Administration (EIA) that Brent would sell for an average of $104 per barrel in 2022 and $94 in 2023. Brent averaged $71 per barrel last year, before Russia's invasion of Ukraine drove prices sharply higher. According to the EIA's July Short-Term Energy Outlook (STEO), WTI will sell for an average of $98.79 per barrel this year and $89.75 in 2023. Last year, WTI sold for an average of $68.21 per barrel.

Click on the image at right for EIA's projection of Brent and WTI crude oil through 2023.

On the natural gas front, Fitch's admittedly conservative "base case" saw prices at Henry Hub averaging $6.25 per million British thermal units (MMBtu) this year, then falling to an average of $4 per MMBtu in 2023, $3.25 in 2024 and $2.75 in 2025. Currently, gas sold at Henry Hub fetches about $7.65 per MMBtu.

Click on the image at right to see Fitch's "base case" for natural gas prices over the next few years.

The EIA, in its July STEO, sees gas prices falling to an average of $6.25 per MMBtu this year and $4.94 next year.

Click on the image at right to see the EIA's projection of gas prices at Henry Hub, Louisiana.

"Over time, we expect energy markets to normalize," in other words, revert to their historical averages, Stirrat told the Denver conference. When asked if prices would fall more because supply would surge, or demand would collapse, he declined to answer.

But as he and his colleague Aristizabal privately acknowledged, their conservative price outlook was partly driven by the industry's history of spending profligately when times were good.

Stirrat said oil and gas producers "have been exercising tremendous capital discipline" in recent years, sending surplus cash to shareholders or banks to lower their outstanding debt. But Fitch believes in addition to paying down debt and enriching shareholders, "we expect incremental cash flows to be allocated to increase capital expenditures." That could be a warning sign.

Perhaps Fitch's "base case" for producer capital allocation is an effort to head off irrational exuberance. As a credit-rating agency, Fitch is paid to assess a company's ability to repay its loans. Adopting a conservative price outlook might not be a bad idea, given the wild spending that took place when oil prices shot up in 2008 and 2013-14. There have been about 274 Chapter 11 bankruptcies declared by oil and gas producers since 2015, according to law firm Haynes and Boone LLP (Dallas, Texas).

For related information, see August 10, 2022, article - Bulls or Bears? Oil Price Volatility May Be the Only Thing That's Certain.

Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.