As 2017 comes to an end, two prominent information services have published their outlooks for the oil and gas industry for the coming year.
Moody’s Investor Service, in its Global Oil and Gas - 2018 Outlook, has presented a generally upbeat perspective on the industry. With volatile oil and gas prices gaining firmer footing and upstream capital expenditure growing, the upstream and midstream sectors of the industry appear on a generally positive trend, while the downstream refining and marketing sectors are stable, the credit rating and research company suggests.
S&P Global Platts, in its 2018 Energy Outlook, anticipates growing global oil supplies, led by U.S. shale oil, with oil inventories continuing to decline despite supplies growing faster than demand. The company says that strong oil demand growth coupled with OPEC-led production quotas are key factors in the decline in inventories.
Moody’s oil price expectation
Moody’s also commented on oil inventory levels, saying that the levels remain high but have started to decline, and that oil prices should remain within a band ranging from $40 to $60 per barrel. Key oil price risks consist of non-compliance with OPEC-led production quotas, the softening of global oil demand and the growth of North American oil production.
The Moody’s report suggests that earnings from exploration and production will grow by more than 10 percent through 2018, as production volumes increase thanks to higher capital spending, with capital markets supporting this sector of the industry. While the global drilling rig count should continue to rise, drilling and service companies should see their best margin opportunities in U.S. and Canadian onshore markets. On the other hand, service-cost inflation should be contained but could rise in some markets. With upstream production set to rise in 2018, the midstream oil industry should experience increases in capital expenditure. And continued robust demand for refined products should maintain a stable outlook for refining and marketing, the report suggests.
Moody’s commented that U.S. natural gas production has been growing but that price levels in 2018 will benefit from demand resulting from increased liquefied natural gas exports, gas exports to to Mexico and gas usage by Gulf Coast petrochemical plants. But, with U.S. gas storage at relatively high levels, Moody’s anticipates gas prices remaining within a range $2.50 to $3.50 per million Btu.
Prices for natural gas liquids have stabilized along with oil prices, Moody’s added.
Lead time on new production
In conjunction with S&P Global Platts’ report, Chris Midgley, the company’s global head of analytics, commented on the robust level of investment in oil and gas development while also cautioning about the lead time required to bring new production on line.
“Planned capital investments across oil over the next couple of years of around $300 billion show that the industry is not underinvesting and is on target,” Midgley said. “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.”
S&P Global Platts also expects a sustained strong demand for refined products, and U.S. crude oil exports continuing to increase. The company sees the demand for petrochemical feedstocks outpacing the growth of demand for other hydrocarbons.
The Platts report also comments on the growing interest in electric vehicles, saying that fears about oil demand destruction by these vehicles is misplaced in the short term. The surge in electric car production to likely annual sales of more than 1 million vehicles needs to be viewed in the perspective of the 80 million new cars that are sold every year, Midgley said. On the other hand, the price of car batteries continues to fall; there have been strong policy statements by various governments and car manufacturers on moves towards electric vehicle production; and there is a strong push towards the use of electrically powered buses.
Natural gas market
Midgley commented that new natural gas production, especially in the Permian basin, is pushing down U.S. gas prices, while growing exports of LNG from the U.S. connect pricing in Asia with U.S. pricing. From a worldwide perspective China’s moves towards achieving improved air quality are driving a major uptick in seasonal liquefied natural gas buying patterns, “where price is no object,” Platts says.
At the same time there is continuing tension between liquefied natural gas producers and LNG consumers: the producers want long-term supply contracts to enable the securing of financing for facility construction while consumers do not want to make long-term commitments. On the other hand, Japan has greatly increased its LNG contract commitments, thus raising some interesting questions over whether some power generation will need to switch to gas, whether there may be further delays in the re-start of nuclear facilities, or whether unsold gas will be pushed back onto the spot market, the Platts report says.
The situation in Qatar is also raising some interesting questions, with the lifting of a gas development moratorium signaling the possibility of competition to lower the price of LNG, Platts says.
Coal resurgence
S&P Global Platts says there has been a resurgence in coal demand, not because of the U.S. president’s pro-coal stance, but because of changing dynamics in global coal markets. In 2017 a combination of the unwinding of coal-to-gas switching in the United States, a high growth in energy demand in China, and the underperformance of nuclear generation pushed up coal demand - coal has been the fuel of choice to meet incremental fossil fuel demand outside Europe, Platts says.
However, Platts expects to see coal demand decelerating in 2018, in particular with China’s clean air policy and the country’s surging renewables production. Platts suggests that 2018 may prove to be the first year of coal-to-gas switching in Asia, supported by LNG supplies from the United States and Australia, and with significant growth in contracted LNG supplies for Japan and South Korea.
