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Forbes publishes an article by energy analyst Robert Rapier titled: Energy Sector Predictions For 2022.
Whenever I make predictions about the energy industry, I always try to strike a balance between realistic predictions and overly obvious predictions. But sometimes we have a year like 2020, when even the most obvious predictions are quickly upended by the COVID-19 pandemic.
The COVID-19 pandemic has caused incredible upheaval in many sectors, including the energy sector. As I've said before, the impact of the pandemic was the single biggest single factor in last year's spike in energy prices, and it will continue to have an impact on supply and demand factors for the foreseeable future. The energy sector is also transitioning to a low-carbon future, and even most major fossil fuel companies openly acknowledge this. Many experts are well aware of the long-term direction of things, but it is much more difficult to predict trends year by year in the short term.
With these factors in mind, here are my predictions for some of the key energy trends this year. As I usually point out, the discussion behind the prediction is more important than the prediction itself.
1. The average price of WTI crude oil in 2022 will be between $70/barrel and $75/barrel
My prediction of oil prices for 2021 last year was a glaring misstep. I predict that oil prices will rise as the economy recovers from the pandemic. But the recovery was stronger than I expected, with a slower supply response. This led to imbalances and oil prices soared far beyond my expectations.
Because oil is still the most important commodity in the world, I usually predict where oil prices will go first. I make this prediction by looking at supply and demand trends as well as inventory levels. According to the Energy Information Administration (EIA), the average daily price of West Texas Intermediate Crude Oil (WTI) is $68.14 per barrel in 2021, nearly $30 per barrel higher than in 2020.
If we look at futures prices, about half of WTI's 2022 contracts are currently above $80/bbl, but they do decline steadily over time, which is in line with my expectations. I expect significant increases in U.S. production this year, which will help curb the oil price increases we see in 2021.
To me, it seems like a reasonable bet that the average price in 2022 will be higher than in 2021, but I don't expect us to see a big price increase as we did a year ago. Therefore, I will predict that the average annual price will eventually be in the range of $70-75/barrel, roughly maintaining its current level. I also think we're going to see a significant reduction in oil price volatility compared to 2021.
Of course, OPEC is always unknown. There is no doubt that they want to push up prices steadily. But I think their power will be more limited this year, see my next prediction.
2. Total U.S. oil production increased for the first time in three years
U.S. oil production fell sharply in the second half of 2020, with production beginning to recover at the end of 2020, but recovering slowly. As a result, production in 2020 is lower than in 2019 and production in 2021 is lower than in 2020. However, despite the second consecutive year of annual decline in 2021, production will begin to recover by the end of 2021. Production reached 11.7 million barrels per day at the end of 2021, still 1 million barrels below the 2019 level, but 1 million barrels higher than the late 2020 level.
In addition, the number of rigs rebounded strongly, which is a good indicator of the future direction of oil production. At the end of 2019, around 700 rigs were conducting oil drilling. In 2020, that number dropped to less than 200 units. But since bottoming out in the summer of 2020, the number of rigs has steadily increased. Baker Hughes BHI's latest weekly report shows a 4.5 percent increase in the number of rigs and a recovery to just under 500 rigs. All of this suggests that the U.S. could produce more oil this year than last year.
3. The average price of natural gas will be lower than in 2021
Last year I predicted that natural gas prices would rise by at least 25% compared to the previous year. This did happen, and this is the second year in a row that I have correctly predicted where gas prices are going. In 2021, the average Henry Hub spot price for natural gas was $3.89/MMBtu, the highest annual average price since 2014.
A decline in oil production means a reduction in the supply of natural gas associated with oil production. This has led to a tightening of supply, which is a factor in the surge in natural gas prices in 2021. But since I believe oil production will continue to climb, natural gas supply will increase. Prices are not expected to fall sharply, but natural gas prices are likely to be lower this year than last year.
4. The Biden administration will announce additional oil releases from SPR ahead of the midterm elections
Although the Strategic Petroleum Reserve (SPR) should be used in emergency situations, politicians have traditionally used it for political purposes. Mainly when voters complain about gasoline prices, the government releases oil inventories in an attempt to steer oil prices down. President Biden has done so once in response to popular resentment over high oil prices. The administration announced the release of 50 million barrels from SPR, and Congress demanded another 18 million barrels sold by the end of 2022, and it is believed that the Biden administration will announce more releases as the election approaches.
Invesco Solar ETF (TAN) will receive a return of at least 20%.
Last year, I predicted that Major Oil and Gas Producer ConocoPhillips would return at least 30 percent in 2021. It rose more than 70% at the end of the year, and the energy sector as a whole outperformed the S&P 500. I don't think we'll see this kind of performance in the fossil fuel sector again in 2022. High expectations have been digested, and after last year's blowout performance, I think it will be difficult for the fossil fuel sector to outperform the S&P 500 for two consecutive years.
But one industry that is really regressing in 2021 is the solar industry. While the solar industry continues to grow – by three digits over the past five years – solar companies are being sold off in 2021. The Invesco Solar ETF (TAN) Fund is based on the MAC Global Solar Index (Index) and invests at least 90% of its total assets in the solar companies that make up the index. Therefore, it is a good benchmark for the solar industry.
Over the past five years, TAN has returned 298%. But in 2021, the fund lost 27 percent due to a sweeping blow to renewable energy companies due to rising costs. However, I believe these PV costs will start to fall in 2022 and the solar industry will get back on track.
In short, the theme of the energy sector's forecast for 2022 is that U.S. oil production will continue to recover, oil and gas price gains will slow as a result, the Biden administration will face increasing political pressure to address gasoline prices, and solar stocks will get back on track.
Source: International Energy Small Data
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