After quite an eventful 2019 in which oil demand growth slowed to its lowest in years and investors questioned the performance of oil and gas stocks, the energy sector meets 2020 with a package of risks that could further dampen the mood about the industry and investors’ outlook for stocks.
Depressed oil demand growth, a possible shift in U.S. policies at home and abroad after the presidential election, the continued pressure on the industry to address climate change, the stock market’s lack of confidence in energy stocks, and adequate levels of financing for natural gas projects are the five key risks ahead for the energy sector next year, Wood Mackenzie’s Simon Flowers writes.
- Weak Oil Demand Growth
This year, oil demand growth has been at its weakest since 2011, as slowing global economic growth and the U.S.-China trade war weighed on every economy in the world, including on the fastest-growing oil import markets in Asia—China and India.
The phase one trade deal last week is a de-escalation of the trade dispute and could help the outlook on oil demand growth for 2020. Almost all forecasters and analysts expect demand growth to pick up next year from the very low growth this year. WoodMac sees oil demand growth more than doubling to 1.35 million bpd from just 600,000 bpd this year, thanks to marine diesel fuels in China and natural gas liquids (NGLs) demand for the growing U.S. petrochemicals capacity. Related: Wanted: Oil Workers With More Tech, Less ‘Roughneck’
Yet, the International Energy Agency (IEA) continues to see an oversupply on the market, especially in the first half of 2020, despite efforts from the OPEC+ coalition to strictly stick to the production cuts in Q1 and pledges by OPEC’s leader Saudi Arabia that it will continue to cut more than it is expected to.
If oil demand growth in 2020 were to disappoint again, OPEC+ will face an uphill task in rebalancing the market, WoodMac says.
- Elections and Energy Policies
If a Democratic candidate were to beat President Donald Trump in the 2020 election, they could not only try to scale down U.S. exploration and production, but they could rethink U.S. policies globally, which would significantly impact the energy industry and markets.
For example, current sanctions on Iran and Venezuela are keeping some 2 million bpd of oil off the market, so if a President Democrat were to rethink current U.S. policies regarding the sanctions and the Iran nuclear deal, the market could suddenly become much more oversupplied than it already is.
Senators Elizabeth Warren and Bernie Sanders, two of the front-runners in the Democratic Party’s race for nomination, have promised to ban fracking, on a collision course with the oil industry and even with some Democratic governors in some western oil states.
It is doubtful, however, that a President can single-handedly pass legislation that would stall U.S. oil and gas fracking, according to WoodMac.
- Policies to Fight Climate Change
The European Union’s (EU) “green new deal” could trigger global acceptance of carbon taxes and tariffs to protect EU products from imports with high carbon footprint, for example, WoodMac’s Flowers says.
Under the Green Deal, the EU pledges to cut emissions by at least 50 percent by 2030 from the current target of cutting emissions by 40 percent. This pledge could have a significant impact on energy companies, according to WoodMac’s director of corporate research Valentina Kretzschmar. Related: Trump Follows Up On His Promise To Protect Syrian Oil
Europe’s oil and gas producers will continue to feel the pressure to follow Repsol’s lead and commit to net zero carbon emissions, she said.
“And oil and gas exporters to Europe, including Russian gas and US LNG, could face a diminishing demand outlook and an impact on their revenues from carbon taxes,” Kretzschmar noted.
- Oil and Gas Sector Credibility in the Energy Transition
The ‘hated’ oil and gas sector has not managed to ‘sell’ to the markets the idea that it could be part of the solution, not the problem. Investors have been shunning energy stocks amid concerns about oil demand in the future.
According to WoodMac, Big Oil and the national oil companies should follow Repsol’s lead in pledging carbon neutrality by 2050.
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- Financing for the ‘Transition fuel’
Last but not least, the world will need adequate levels of financing for gas and liquefied natural gas (LNG) projects, because right now, it’s natural gas that will play the ‘transition fuel’ role to keep power supply steady in a growing mix of solar and wind power globally.
“The industry needs to work harder in 2020 to demonstrate the benefits of gas and its environmental credentials – in tandem with carbon capture and storage – to ensure that finance for much-needed gas projects doesn’t dry up,” WoodMac’s Flowers said.
By Tsvetana Paraskova for Oilprice.com
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1-Weak Oil Demand Growth
Even while the trade war was raging, the fundamentals of the global oil market were positive as evidenced by the global oil market adding 1.2 million barrels a day (mbd) over 2018 and China which accounts for 85% of global demand growth breaking new records of crude oil imports projected to average this year at almost 11 mbd. The start of a de-escalation of the trade war will enhance the global oil demand and oil prices.
While oil prices will start to rise, they are not going to hit $75b a barrel until the end of the first quarter of 2020 when the glut that has been widened to 4.0-5-0 mbd by the trade war starts to decline.
2-Elections and Energy Policies
Despite being the most confrontational and the most ill-informed president in the history of the United States who has badly tarnished the reputation of his country worldwide, President Trump will most probably be re-elected to four more years in the White House because of his populist policies. Therefore, a change of energy policies in the US will not materialize.
3-Policies to Fight Climate Change
Policies to fight climate change will have no effect whatsoever on oil and gas exports to Europe, including Russian gas and US LNG. Oil and gas will continue to reign supreme until a proper energy transition has taken place.
Four pivotal principles will govern the global energy scene. The first is that there will never be a post-oil era throughout the 21st century and far beyond. The second is that there will be no peak oil demand either. The third is that an imminent energy transition is an illusion. And the fourth is that oil and gas will continue to be the core business of the global oil industry well into the future.
4-Oil and Gas Sector Credibility in the Energy Transition
Big oil has been investing heavily in clean energy solutions. But they are not going to abandon their very profitable oil and gas business until their returns from renewables match those from oil and gas. And with the world consuming 100 mbd and growing, an imminent energy transition looks like a mirage.
5-Financing for the ‘Transition fuel’
There is plenty of gas reserves to satisfy growing global demand well into the future provided gas prices rise to a level to stimulate continued exploration and production. Gas will continue to displace coal in electricity generation along with an increasing share from solar electricity.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London