The end of a year and the start of a new one is usually a time fraught with forecasts about the trends that will shape the year for a particular industry. Oil and natural gas is no exception: December and January abound in forecasts, predictions, and outlooks for the new year.
By April, it has usually become clear which forecasts were on the money and which were either premature, lay, or plain wrong. Here are five trends that are clearly evident and likely to dominate the industry until at least the end of the year.
- Tight supply
There is a reason most investment banks and energy consultancies keep forecasting higher prices going forward in 2023 despite considerable worry among traders about the state of the global economy.
The reason is called supply and the explanation for the bullish price forecasts is that supply of crude oil is tightening on a global level. OPEC+’s recent decision to reduce production by another 1.16 million barrels daily amid a price slump driven by factors outside of the industry is one example of where supply is headed but it’s not the only one.
The U.S. shale industry that went through a veritable boom during the last decade has transformed into a much more frugal, much more efficiency-oriented industry. The shale boom was proclaimed over last year, repeatedly, and there is little reason to believe these particular reports are exaggerated.
U.S. shale oil output will continue rising—as long as the price is right—but it won’t be rising at what the industry previously saw as its usual fast pace.
- Higher investments... because of inflation
While supply tightens both organically and artificially, demand for oil is being forecast at higher levels this year than last. The International Energy Agency expects oil demand to hit a record this year and exceed supply in late 2023. And the industry is preparing to respond.
Wood Mackenzie reported earlier this year that global upstream investments will continue their rebound that began last year, hitting some $470 billion this year. However, about half of that increase, Wood Mac noted, would be the result of higher costs rather than greater ambitions in production growth.
In other words, Big Oil and its smaller sector players are firmly on the path of frugality, which is hardly surprising in light of the constantly intensifying push from governments and activist organizations to produce less oil and gas, whatever the demand outlook.
- Focus on low carbon
It is because of this growing pressure that the oil and gas industry is turning towards a diversification into low-carbon energy, including carbon capture. That’s particularly true of the U.S. majors: Chevron recently announced growth plans in that area and Exxon went even further, saying one day its low-carbon business could overtake oil and gas as income contributor.
“In order for the energy transition to be successful, it has to be made economically viable, and that’s a big part of our job and building this business,” Dan Ammann, the head of Exxon’s low-carbon business division told the FT earlier this month, adding that this business division could be increase in value to hundreds of billions of dollars and eclipse Exxon’s traditional operations.
In Europe, the majors are still focusing on wind, solar, hydrogen, EV charging and the rest of the transition activities they had been focusing on for years. But they, too are opening up to carbon capture and storage.
- OPEC’s growing influence
A few years ago analysts argued that because of the advent of U.S. shale, OPEC is losing relevance, fast. Then came OPEC+, Saudi Arabia teamed up with Russia, and the larger organization came to account for an even higher portion of global oil supply than OPEC on its own used to.
As the latest move by the extended cartel shows, that organization is perfectly ready and willing to pull the market’s strings to its advantage. It has no obstacles to doing that because OPEC+ is made up of state-owned companies. There is no investor activist pressure on these companies.
Notably, there is no government pressure because all the OPEC+ governments are too aware of the benefits of oil revenues to just drop them in the name of a higher goal in the form of the energy transition.
- Gas in the spotlight
In case last year didn’t make things clear enough, this one will: natural gas is making a comeback after being dismissed by transition advocates as too dirty to be a bridge fuel.
All it took was an energy crunch caused in substantial part by a gas shortage in Europe to force decision-makers into the realization that transition plans are all very well but people need energy right now, not in 2050.
This realization is giving a major push to new U.S. LNG capacity since the country has become Europe’s biggest supplier of the liquefied fuel that is replacing Russian pipeline deliveries.
Gas resource development is also getting more encouragement and support in Africa, too—another alternative source of energy for Europe. Gas, one might say, is experiencing a renaissance.
By Irina Slav for Oilprice.com
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