Q1/22 Commodity Price Deck Update
Ukraine Invasion a Potential Game-changer for Energy Markets Increasing Long-term WTI To US$65/bbl (Brent to US$70/bbl)
TD Investment Conclusion
We are updating our commodity price deck for Q1/22 results, and increasing our forecasts for 2022+. Brent/WTI prices have rallied 20%/22% q/q, respectively (and 51%/58% YTD), while NYMEX/AECO prices have declined 4%/1% q/q. We estimate that Q1/22 FFOPS increased an average 33% q/q for our oil-weighted coverage (>50% of production) and 24% for our natural-gas-weighted coverage. We are raising our 2022 Brent assumption to US$89.75/bbl (from US$74/bbl) and WTI assumption to US$85/bbl (from US$70/bbl). We are also boosting our long-term Brent/WTI forecasts by another US$5/bbl to US$70/bbl/US$65/bbl. For gas, we have tweaked our 2022 NYMEX assumption to US$4.50/mcf (from US$3.85/mcf) and AECO assumption to C$4.35/mcf (from C$3.55/mcf).
Oil: Russia's invasion of Ukraine has upended the global oil markets for the foreseeable future, in our view. Although the impact on Russian supply (~11 mmbbl/ d) remains uncertain, we are confident that even with de-escalation, a return to status quo is highly unlikely. The foreign capital exodus has been swift and dramatic, which potentially leaves the Russian hydrocarbon business undercapitalized going forward. In addition, all major U.S. OFS companies have exited the country, leaving a dearth of technical expertise. We are quite concerned about Russia's ability to maintain supply (let alone grow it), and the limited ability of other countries to fill the void after years of underinvestment. However, we believe the majority of sidelined Russian oil production will eventually find a home in more sympathetic countries, albeit at discounted prices (Urals/Brent discount ~US$30/bbl). Although we have elected not to chase spot oil prices too aggressively, given extreme volatility and record backwardation, our new deck still generates enough returns across our coverage to maintain an OVERWEIGHT sector stance.
Natural Gas: Like oil, the Ukraine invasion has materially shaken global natural-gas markets. European natural-gas prices have spiked, global LNG prices have rallied, and North American prices have remained at historically strong levels—although still well below global pricing. Looking ahead, although we have increased our N.A. gas- price assumptions through 2023, we see downside from current levels. In our view, the recent drop in U.S. inventories over the past two months was largely the product of extreme weather that temporarily affected both supply and demand. With winter in the rear-view mirror, we expect inventories to trend back to normalized levels (as they were as recently as January). Although there is renewed discussion of "unleashed" U.S. LNG exports, material expansions are longer-dated than the forecast period. In the interim, at current pricing, we expect that producers will add incremental, highly economic, short-cycle supply to a market that has limited incremental egress capacity through 2023.
We are maintaining our OVERWEIGHT sector stance for the Canadian and U.S. energy equities.