Energy Focus: Q1 2017

17 February 2017 | World Views | Capital International and Sharenet
 


Rising crude prices expected to continue

In the calendar year of 2016, the price of crude oil in USD terms rose by approximately 21.5%, as the global economy continued to deliver GDP growth that surpassed most economic forecasts. However, it is worth remembering that if we spin back two years, the price of oil is down 17% in USD terms, and over a three-year period the price has dropped 33%.

History has shown that in commodity super cycles, the bear market repercussions, notably the huge cuts in capital expenditure, nearly always sow the seeds for the new bull market. Given the 2017 GDP growth forecast of 3.6%, it seems likely that crude oil can track higher as the year progresses, possibly towards the $65 per barrel level.

The supply side dynamics have been helped by the OPEC production agreement and also the depth of the previous year’s capital expenditure cuts. Since the peak in 2014, the overall global capital expenditure has fallen by a staggering 45%. Oil consumption is expected to be relatively flat as increases in energy efficiency offset growth in the transportation and industrial activity.

Renewables likely to see highest growth

Fundamentally, the global shift in energy usage remains away from legacy carbon-based products to more renewables. In a recent strategy statement, BP argued that energy consumption will only grow at an average of 1.3% per annum for the next 20 years, rather than the 2.2% rate of the previous 20 years. In the years to come, renewables will see by far the largest annual growth rates. We touched on this in last year’s focus article on renewables in Q2.

Clearly, legislation around the world is also driving this feature, with many governments targeting 20% of all energy coming from this area. Indeed, a recent report from the European commission suggests that the EU is making good progress towards this goal, but that the UK is lagging well behind. There is tremendous disparity across the region with Sweden now at an impressive 54%, whereas the UK is at a lowly 8.2%.

Mixed prospects for demand of other fuel sources

Natural gas growth is expected to outstrip other fuel sources in terms of quantity of energy consumed, led by demand from the industrial and electric power sectors. There is also a boom in the liquefied market which is boosting global access. Gas demand looks set to be notably robust in Europe, where there is considerable uncertainty over the French nuclear sector.

In the last year we have witnessed a surprising renaissance in global coal prices, which have risen by 62%. Coal consumption decreases as coal loses market share to natural gas and renewable generation, notably in the electric power sector. Indeed, it is now the power generation sector that accounts for nearly half the demand for global energy, and with the spread of technology and the rise of the Asian consumer/middle class, this looks set to continue.

It is believed that from 2020, the global demand for the fossil fuel will fall away and there remain major signs that it is a tarnished sector. China has recently suspended 104 coal projects and Deutsche Bank has announced it will halt investment of all new coal financing, and scale back existing exposure to the thermal coal mining sector.

Nuclear energy targets somewhat unrealistic

The World Nuclear Association (WNA) has a target by 2050 that nuclear power will be responsible for 25% of global electricity requirements. This will require a significant investment programme, with approximately 1000 GWe of new nuclear capacity to be constructed. Using the average plant as an example, this will require 125 - 150 additional sites.

To put this into context, nuclear power has been flat for the past 20 years. Using figures from the (WNA), global nuclear capacity has grown 12.7% over the past 20 years and 5.7% over the past decade. However this includes plants that are currently idle. The issue is that many of the operators are financially stretched and simply do not have the funds to invest, and falling wholesale electricity prices are mostly to blame.

Trump’s protectionism could boost US shale oil production

No article would be complete at the moment without mentioning the new US president, Donald Trump. The US still consumes approximately 20% of global oil production and despite the rise in recent years of domestic shale oil production, it still has to import nearly 50% of its requirements.

Under the new administration there is a new tax on the horizon, the Border Adjustment Tax, which could place 20% on to the imported price. This is clearly a huge cost, which will ultimately be borne by a step change in the pricing environment.

Indeed, this firmer domestic backdrop could be a major factor in the recent announcement by ExxonMobil, that it will double its US shale production and keep it at these levels for several decades to come.

Performance of oil majors

In the UK, Royal Dutch Shell has continued to be an excellent equity performer, reaping the rewards of its bold 47 billion acquisition of BG Group, first announced in 2015. The company has been busy optimising the portfolio and has recently made a significant withdrawal from the UK, in favour of deep-water operations in areas such as Australia and Brazil. There will however be significant long-term liabilities in the North Sea for future decommissioning costs.

BP has also been fine tuning its portfolio, with some impressive recent acquisitions in Abu Dhabi, Egypt and Senegal. The company also has one of the best capital-efficiency disciplines in any oil major, and there is scope for even more cost savings.

There is evidence that in recent months the majors are back in acquisition mode, but this time in the smaller exploration companies. For instance, in the last quarter over 20 billion of takeover deals have been announced globally. French giant, Total, has been busy with deals in the Brazilian deep water province and boosting its presence in Uganda’s Lake Albert discovery. Most of the deals announced in recent months have been based on a long-term oil price of about $60 a barrel to $65 a barrel.

Supporting the sector in the long term are demographic factors such as the fact that global population is projected to increase by around 1.5 billion people to reach over 9 billion people by 2050. Understandably, much of this expected growth is driven by emerging economies, with China and India accounting for around half of the increase.


Capital International Group

Email: info@capital-iom.com

Web:http://www.capital-sa.com/

logo


Disclaimer:
The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs. The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Sharenet.

Rate This Article

Your feedback is appreciated and helps us improve our content.

AVG RATING: 0

Thank you for helping us improve our content.

Rate This Article

Your feedback is appreciated and helps us improve our content.

AVG RATING: 0

Thank you for helping us improve our content.

Rate This Article

Your feedback is appreciated and helps us improve our content.

AVG RATING: 0

Thank you for helping us improve our content.