André Hutzli, Energy Sector Head, gives his insights and the key messages of the IP Week.
The 2018 edition of the IP Week in London – an annual gathering of the main Oil & Gas players – illustrated better than ever the quote from the famous French comedian Pierre Dac: “Nothing is more unsure than the uncertain”.
A measured optimism
The particular configuration of the factors driving crude oil prices on the one hand, and the mid-term effects of the energy transition on the petroleum industry on the other, generate a certain degree of uncertainty in the sector. Even so, that didn’t prevent a cautious optimism from permeating the event, buoyed by a healthy revival of the global economy.
A supply backlash in 2018?
In this context of synchronised global economic revival, a growth in oil demand is anticipated (+ 1.4 mbd in 2018) (1) and the general feeling is bullish, supporting a higher investors’ appetite for riskier assets. Even so, the increase in non-OPEC petroleum production expected in 2018 (+ 1.7 mbd according to the IEA), notably from the United States, Canada and Brazil, should exceed this expected rise in demand. Especially as the prices, sustained over recent months, have encouraged unconventional American producers to increase their production. To such a degree that US production exceeded the 10 mbd mark in November 2017, a level not reached since 1970, as such repositioning the country in the same league as Saudi Arabia and Russia. Indeed, on 27 February, Fatih Birol – Executive Director of the IEA – spoke of an “explosive increase” in unconventional US production, immediately causing a drop in Futures of more than 1.9% on the New York market. In this context, notwithstanding that prices have been kept on the high-side during the recent months in particular thanks to the robust global economic revival, a supply backlash appears perfectly plausible in 2018.
Other factors of uncertainty remain
Other key factors influencing the direction of crude oil prices are more difficult to read :
Will OPEC+ be in a position to maintain its rigorous production cuts in 2018?
Nothing is less certain, even more so as OECD stocks – which appear to serve as benchmark for the production cuts that OPEC+(2) said would be maintained until global stocks abate to their last 5 years average level – have continued to ebb and are now drawing closer to that mark (currently 52 mb above last 5 years average vs. 264 mb just one year ago according to the IEA). The US dollar The current weakness of the US dollar despite rising interest rates in the United States, which pushes up volumes of long Brent positions.
Last but not least , the geopolitical uncertainties in several regions (Iran, Iraqi Kurdistan, North Korea, Syria, North Africa, Venezuela, ….), fuelled by the “impetuosity” of several global political leaders, greatly increase market instability.
Profit margins still under pressure
Other topics for which the IP Week served as a sounding board included profit margins, which for trading activities are seen to remain within subdued territories in 2018. With regards to bunkering – an activity that has demonstrated a slight improvement in profit margins over recent months – profits are also likely to remain under pressure, particularly given the cost optimisation strategies set-up by shipping companies.
The energy transition: A source of opportunity
Some traders are also taking advantage of trading opportunities arising pursuant to the decommissioning of power stations and the development of renewable energies. The increase of the share of renewable energies in the mix has indeed triggered higher volatility in the European power markets. This situation is thus creating a growing need for “balancing” and security of supply services, as well as investment opportunities in flexible production assets (“peakers”). Interesting to note that these activities, highly dependent on the weather (sun/wind), are creating an increasing demand for meteorological experts by the community of traders active in this sector. It is clear that the energy transition can carry interesting long term profit opportunities for traders. Although the share of renewable energies in the mix is in sharp increase and set to exceed 18% of primary energies by 2040, the same goes for natural gas/LNG whose market share should be close to 25%(3) by the same time horizon, and whose lower carbon profile makes it a convenient fossil energy for the implementation of decarbonisation objectives. Oil – even if its share in the mix is expected to contract in the coming years – will continue to play a central role in the security of energy supplies for several decades, still representing an estimated third of the total energy mix by 2040. BNP Paribas is a longstanding partner of the energy industry and is committed to the energy transition. BNP Paribas thus ensures it provides financing solutions that reinforce the diversification and decarbonisation of the primary energy mix, while supporting the security of energy supplies. This implies a sustained support to the energy industry players in particular those active in natural gas, conventional crude oils, renewable energies and biofuels André Hutzli | BNP Paribas Energy Sector Head, STS EMEA (1) Source BNP Paribas Global Market Research (2) OPEC+: OPEC plus countries associated with production cuts, in particular Russia (3) Source IEA