“Concerns still remain with respect to the response of U.S. shale oil to higher oil prices. However, the shale hype seems to be over, with CEO's and management teams being held strongly accountable to deliver positive cash flow over production growth even with oil prices above $60/bbl,” said Chris Midgley, global head of analytics, S&P Global Platts.
“Planned capital investments across oil over the next couple of years of around $300bn show that the industry is not underinvesting and is on target. However, these new projects will not emerge until well into the 2020s and in the short term (2019-2021) it would appear that we might be heading towards a period of supply tightness and will be relying on U.S. onshore shale to respond to fill the gap. The World Bank's announcement that it will stop financing upstreams oil & gas projects may have a significant impact on new projects,” said Midgley.
Global oil market rebalancing accelerated in 2017 with surplus stocks falling 1 MMB/D during the course of the year, virtually eliminating the entire surplus.
Strong oil demand growth and the OPEC/non-OPEC cuts were the key factors driving the inventories decline.
2018 will see global supply, led by U.S. shale, grow faster than demand; but stocks will still decline, supporting oil market backwardation and relatively strong nominal prices.
With strong demand growth and ongoing refinery capacity limitations expected to continue in 2018, refinery margins will stay strong with healthy gasoline cracks, higher distillate cracks, and ongoing firmness in heavy fuel oil (HFO) cracks.
U.S. crude oil exports will increase further with coastal grades continuing to price in export parity. But West Texas Intermediate (Cushing, Oklahoma) price differentials vs. coastal grades and Brent will be firmer in 1Q18, with new pipelines starting up that will allow excess inland crude stocks to decline.
Key areas to watch: China product export quotas (expect modest increases), Mexico refinery recovery (expected to be slow/partial), and new refinery start-ups in Turkey and Vietnam (expected on-stream commercially later in the year).
Electric Vehicles (EVs)
“Fears in the media about demand destruction from EVs in the short term are misplaced; and despite impressive growth figures and annual sales likely to head above 1m new EVs a year, this has to be put into perspective with the 80m new cars sold every year,” said Chris Midgley, global head of analytics, S&P Global Platts.
Battery prices continue to decrease, and 2017 saw strong supportive policy statements from both the demand side (the U.K., France, China, etc.) and the supply side (Volvo, VW, GM, Tesla, etc.). China is at the forefront of efforts, and its strong push for electric buses affects diesel demand as well.
“New production, particularly in the Permian, has increasing associated gas putting downward pressure on Henry Hub prices; meanwhile, growing exports of U.S. LNG connect JKM* prices in Asia back to the U.S., which in turn now have to compete with carbon-adjusted coal import prices to China as the market becomes increasingly liquid and less reliant on long term contracts,” said Chris Midgley, global head of analytics, S&P Global Platts.
The development of new liquefied natural gas (LNG) liquefaction remains caught between producers wanting to sign long-term contracts in order to secure financing and consumers wanting maximum buying flexibility and showing little interest in making such a commitment.
An aggressive shift in Chinese policy toward rapidly improving air quality has led to a major uptick in seasonal LNG buying patterns, where price is seemingly no object.
Qatar's lifting of its gas development moratorium triggered a wakeup call to competitors that lowering LNG costs will be necessary to compete. Like the Saudis, Qatar is concerned that the value of its assets in the ground has peaked, so the impetus for delaying development is no longer in place.
The onslaught of new LNG supply arriving in 2018 will test the market's ability to consume or store it during the second and third quarter of the year without a major reduction in price.
Japan's massive increase in LNG contract obligations will create a choice for its buyers: either force burn LNG at the expense of coal, oil, and additional nuclear re-start delays, or push large unsold volumes back into the spot market.
Qatar will offer to adapt spot pricing such as JKM, TTF*, and PSV** as its new Asian and European standards, as its legacy oil-indexed contracts begin to roll off heavily in 2022.
Petrochemicals and NGLs
“Crude oil demand is increasingly being substituted by other liquids such as biofuels, NGLs and LNG resulting in the call on refining being significantly depressed compared with the growing demand for liquid oil products. Ethane, has become the chameleon of the hydrocarbons either appearing (or being accounted) as gas if rejected into natural gas or being treated as a liquid if used as a chemical feedstock, thus creating the connection between oil and gas prices through Chemical Cracker feed optimisation,” said Chris Midgley, global head of analytics, S&P Global Platts.
Petrochemical feedstocks will continue to outpace the growth of most other hydrocarbons, and will be the fastest growing sector in 2017 and 2018. Total world ethylene cracker capability has been on the rise over the past several years. The capacity growth in 2017 was a very high 7.9 million metric tons or 4.7% of world capacity. Expansions in 2017 were primarily in the U.S., China, and South Asia.
- Coal demand bounces back: coal demand surged in several markets around the world in 2017. From unwinding of coal-to-gas switching in the U.S., to sizeable overall energy demand growth in in China, to underperforming nuclear generation, coal was generally the fuel of choice to meet incremental fossil fuel demand in the power sector outside of Europe in 2017. President Trump's support for the U.S. coal industry not moving the needle, despite promises to the contrary.
Coal demand to decelerate in 2018, led by China: a combination of surging renewable generation and a clean air policy will reduce China's coal consumption, which will have an outsized bearish impact on the global coal market. Recovering nuclear output in Europe and Asia will also serve to constrain coal-fired generation.
2018 could be the first year of coal-to-gas switching in Asia: with surging LNG supply from the U.S. and Australia coupled with sizeable growth in contracted LNG supply into Japan and South Korea, there are risks that excess gas supply will need to be disposed of in the power sector at the expense of coal.
*JKM – Platts Japan-Korea Marker – spot price of LNG as delivered into Asia
**Dutch Title Transfer Facility (TTF)
***Punto di Scambio Virtuale (Virtual Trading Point- PSV)