The year 2018 has been quite a rollercoaster. It started off with optimism, veered into uncertainty and ends with the blues. Oil prices started on an upward swing at US$66/b for Brent, reached a peak of US$81/b, then fell to a low of US$49/b. The market swang from balanced supply/demand to a supply crunch to a glut – dealing with American sanctions on Iranian crude exports, surging American crude oil production, the implosion of Venezuela’s economy and signs that the global economy might be entering a slowdown. If this was a wild ride, what could 2019 hold?
Quarter 1 2019 – The crude oil market will start the year off in a slightly stronger position than it ended 2018, bouncing back from recent lows at US$54/b. The new OPEC+ supply deal – which aims to curb production by 1.2 mmb/d – goes into effect, and traders will be watching to see if the cuts have a material impact. Sometime in the first quarter, American crude oil production will hit 12 mmb/d, cementing its position as the world’s largest oil producer as Saudi Arabia and Russia cut back output as part of the OPEC+ supply deal. Upstream production curbs in Canada’s Alberta – hampered by pipeline capacity – will continue. A new Democrat-led House of Representatives takes office in the US, which could frustrate President Donald Trump’s agenda, with the threat of investigation and impeachment raising the risk of triggering volatility.
Quarter 2 2019 – OPEC+ meets in April to review the supply deal agreed in December 2018. Saudi Arabia has been promising ‘deeper cuts’, but there will be pushback from some members worried about ceding ground to American shale. Russia has already expressed some reticence, and Iran is unlikely to support another major cut. The power of OPEC – which has already lost Qatar as a member – will be questioned. A lot will depend on the question of American waivers of Iranian crude imports for eight major buyers, which expire in May. The waivers should continue – which should allow room for negotiation – but a shock could happen if they are allowed to expire.
Quarter 3 2019 – The first of a new wave of pipelines connecting the Permian Basin to the US Gulf Coast should begin commissioning and operation. With capacity of at least an additional 1.5 mmb/d of American shale oil making it to market, this could trigger another boom in Permian output and change the dynamics of the global oil market, just as American LNG has upended the global gas market. OPEC’s bi-annual Vienna meeting in June will address this. Will there be a place for light, sweet US crude in the world, particularly since there will continue to be a global oversupply of gasoline? Perhaps for petrochemical use, but refining demand will increasingly be geared toward medium and heavier grades to be cracked by upgraded refineries into gasoil ahead of the IMO’s new rules of fuel oil and sulfur levels rolling out in 2020
Quarter 4 2019 – Depending on market conditions, American crude production could be on the cusp of hitting 13 mmb/d – presenting yet another problem as OPEC meets in December. The inexorable rise of US oil is inevitable, and we could see OPEC switch tactics from accommodation to aggression. If the Iranian crude export waivers are extended in May, they will end in this quarter – throwing another finicky variable into a complicated year. The year might end the way it began, characterised by a frustrating stalemate between free market and controlled oil production.
Major predictions for 2019 oil prices (Brent)
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Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b
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Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.Executive summary
The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.Global gas: Demand expected to grow 0.9 percent per annum to 2035
While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.
Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28
We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.
Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.
With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.Key themes uncovered
Over the course of our analysis, we uncovered five key themes to watch for in the global gas market:
Challenges in a growing market
Gas looks the best bet of fossil fuels through the energy transition. Coal demand has already peaked while oil has a decade or so of slowing growth before electric vehicles start to make real inroads in transportation. Gas, blessed with lower carbon intensity and ample resource, is set for steady growth through 2040 on our base case projections.
LNG is surfing that wave. The LNG market will more than double in size to over 1000 bcm by 2040, a growth rate eclipsed only by renewables. A niche market not long ago, shipped LNG volumes will exceed global pipeline exports within six years.The bullish prospects will buoy spirits as industry leaders meet at Gastech, LNG’s annual gathering – held, appropriately and for the first time, in Houston – September 17-19.
Investors are scrambling to grab a piece of the action. We are witnessing a supply boom the scale of which the industry has never experienced before. Around US$240 billion will be spent between 2019 and 2025 on greenfield and brownfield LNG supply projects, backfill and finishing construction for those already underway.50% to be added to global supply
In total, these projects will bring another 182 mmtpa to market, adding 50% to global supply. Over 100 mmtpa is from the US alone, most of the rest from Qatar, Russia, Canada, and Mozambique. Still, more capital will be needed to meet demand growth beyond the mid-2020s. But the rapid growth also presents major challenges for sellers and buyers to adapt to changes in the market.
There is a risk of bottlenecks as this new supply arrives on the market. The industry will have to balance sizeable waves of fresh sales volumes with demand growing in fits and starts and across an array of disparate marketplaces – some mature, many fledglings, a good few in between.
India has built three new re-gas terminals, but imports are actually down in 2019. The pipeline network to get the gas to regional consumers has yet to be completed. Pakistan has a gas distribution network serving its northern industrial centres. But the main LNG import terminals are in the south of the country, and the commitment to invest in additional transmission lines taking gas north is fraught with political uncertainty.
China is still wrestling with third-party access and regulation of the pipeline business that is PetroChina’s core asset. Any delay could dull the growth rate in Asia’s LNG hotspot. Europe is at the early stages of replacing its rapidly depleting sources of indigenous piped gas with huge volumes of LNG imports delivered to the coast. Will Europe’s gas market adapt seamlessly to a growing reliance on LNG – especially when tested at extreme winter peaks? Time will tell.
The point-to-point business model that has served sellers (and buyers) so well over the last 60 years will be tested by market access and other factors. Buyers facing mounting competition in their domestic market will increasingly demand flexibility on volume and price, and contracts that are diverse in duration and indexation. These traditional suppliers risk leaving value, perhaps a lot of value, on the table.
In the future, sellers need to be more sophisticated. The full toolkit will have a portfolio of LNG, a mixture of equity and third-party contracted gas; a trading capability to optimise on volume and price; and the requisite logistics – access to physical capacity of ships and re-gas terminals to shift LNG to where it’s wanted. Enlightened producers have begun to move to an integrated model, better equipped to meet these demands and capture value through the chain. Pure traders will muscle in too.
Some integrated players will think big picture, LNG becoming central to an energy transition strategy. As Big Oil morphs into Big Energy, LNG will sit alongside a renewables and gas-fired power generation portfolio feeding all the way through to gas and electricity customers.
LNG trumps pipe exports...
...as the big suppliers crank up volumes