Geopolitical uncertainty will continue to fuel energy price volatility in 2023, report says

Energy prices will likely be volatile in the first quarter of 2023 as geopolitical uncertainty continues, says a new forecast from Deloitte.

Global factors including the war in Ukraine and China's rocky COVID-19 reopening will continue to contribute to tension between supply and demand, according to the firm's energy, oil and gas price forecast released Monday.

"We fully expect volatility to continue," said report author Andrew Botterill.

After breaching the $100 US mark for the first time in close to a decade earlier in 2022, crude oil prices slid in the back half of the year as interest rates rose, then rallied briefly as China started moving away from its zero-COVID policy.

Botterill said in the first quarter of 2023, China's reopening will continue to be a key focus as many questions remain unanswered about how the shift will affect global demand and whether it could cause a supply-and-demand crunch.

Other major factors for oil prices have included OPEC-plus production cuts and moves to cap the price of Russian crude which Deloitte says could lead to disturbances in global supply, while natural gas prices have been influenced by regional weather forces and storage levels, especially in Europe.

Global demand for North American oil and natural gas will likely elevate prices and benefit Canadian energy companies, Botterill said.

He said the widening differentials between Canadian and U.S. oil prices will likely continue into 2023.

Meanwhile, for natural gas he said the big question will be how much will be exported from the U.S. and therefore how much Canadian product the U.S. needs to fulfil domestic demand.

"Canadian volumes may be needed to help feed the U.S. economy, meaning more robust prices," he said.

Bracing the balance sheet

Though the windfall from higher energy prices last year would normally lead companies to increase their budgets and invest in larger projects, in 2023 companies will likely be bent on shoring up balance sheets and bracing themselves for continued volatility amid continued geopolitical uncertainty and talk of recession, said Botterill.

That means companies may focus more on piloting and policy development this year before making multibillion-dollar investments in longer-term projects, said Botterill.

"They want to make sure they ... don't drive themselves into a lot of debt," he said.

Though there's a lot of attention on longer-term sustainable energy projects, Botterill said energy companies will approach these investments with caution, not just because of the economy but also because of uncertainty around government policies.

"We've seen different countries take a lot of different stances on different policies to help support decarbonization investments. But as there's a lot of looseness around those policies and how they're going to be, how they're going to roll out into the sector," he said.

"We're going to see [producers] making really laser-focused investments on piloting and understanding technologies and understanding the risk and then getting a little bit more policy understanding and security."