Expected sector trends
Short-term projections for the energy sector
Since crude prices fell in 2014, the supply dynamics and demand necessary for adjusting the oil market imbalance were been met for the first time in 2017. According to the International Energy Agency (IEA), these dynamics will continue in the short term.
The Agency views the production cut agreement involving OPEC, and some non-OPEC countries led by Russia, as a main factor in the balance. The market will be keeping a close eye on OPEC's fulfillment of its production-cut commitments. This will have a direct impact on the listed price of crude oil.
In non-OPEC countries, the IEA expects a significant recovery in oil production in 2018, of about +1.66 million barrels per day (bbl/d). Almost all of this increase will be concentrated in the United States (+1.51 million bbl/d), with much more modest contributions from Canada and Brazil.
The positive level of demand that there has been for oil since 2015 will continue in 2018. Non-OECD countries will be the largest drivers of growth, reaching 1.2 million barrels per day for consumption; while OECD countries reach 280 thousand bl/d; marking a fourth consecutive year of increased demand in the region.
With these dynamics and pursuing the level of compliance with production cuts, the IEA data shows a deficit in the global market this year; with global inventories reaching up to 500 thousand bbl/d, a very similar figure to last year.
The evolving US market will be particularly relevant to gas in the short term as the largest producer and consumer of gas, and biggest liquefied natural gas (LNG) exporter worldwide since 2016.
It is hoped that the balance adjustment started in 2017 will continue in 2018 and 2019. The performance of domestic production will be key; maximized by a context where the recovery of crude prices could mean larger volumes of gas associated with oil production. This is something that could push prices down.
Despite the questions raised by the evolution of production, a solid increase in the demand for exportations of LNG and gas through pipelines to Mexico is anticipated. In 2018 and 2019, the liquidation capacity will increase further, with use of new exportation terminals (Cove Point, Elba Island, Freeport, Elba Island, and Cameron LNG); and the capacity for gas through pipelines to Mexico. We also anticipate starting up new industrial plants (petrochemicals, fertilizers, and methanol), especially from 2019, Additionally, the climate this year is conducive to gas consumption, with a colder winter and a warmer summer than last year.
All of this means that prices could increase to 3 $/mmBtu.
Long-term projections for the energy sector
The IEA's baseline scenario data (“Nuevas Policies” Scenario from the World Energy Outlook 2017) projects a more efficient future with more renewable energy sources and lower CO2 emissions; where fossil fuels continue to supply the bulk of the world's energy demands, despite making up a lower proportion of the global mix of primary energy.
In this scenario, although fuels account for less than their current 81% of the global mix of primary energy, they will stay as the largest component, with 75% by 2040. In this way, oil will continue to be the most important primary energy source of, making up 28% of the mix. On the other hand, natural gas will be the only fossil fuel to increase its proportion of the mix, to 25%. Renewable energy sources (biomass, hydroelectricity and "other renewable sources") will move from representing 14% of energy consumption to close to 20%, because of the growth of "other renewable sources" (mainly solar and wind energy).
In this context, the growing demand will be slowed down by improved efficiency. Demand will increase by almost 30% by 2014 to 17.6 million tons of oil equivalent (toe); the equivalent of adding the demand of another China and India to current levels. Economic growth, population growth and urbanization processes (incorporating a city that is the size of Shanghai every four months until 2040) will cause the increase in demand.
Long-term projections for the global primary energy mix
Source: IEA and Repsol's Division of Studies.
According to the IEA, CO2 emissions produced by the energy sector will increase at a rate of 0.4% per year until 2040, when they will equal 35.7Gton. They will fall or stabilize in advanced economies, but grow in developing economies. The level of emissions derived from this baseline scenario does not meet the objectives set in the Paris Agreement; implying that the global limit for admissions will be reached ahead of 2025. Because of this, we would need to make additional efforts, particularly in energy efficiency, and looking deeper into renewable energy sources.
The IEA quantifies these efforts in its alternative scenario "Sustainable Development", which solves the issues of universal energy access, and local pollution problems to reduce the premature deaths it causes; as well as reducing CO2 emissions, in line with the Paris Agreement (at 18.3 Gton in 2040). As well as climate change, more than a billion people today do not have access to electricity, almost 3 billion do not have access to modern energies for cooking, and over 6.5 million die every year because of pollution.
The global economy showed a notable surge in 2017. After growing by 3.2% in 2016, global activity expanded by 3.8% in 2017; exceeding expectations and leaving two consecutive years of slowed growth behind. Improvements in synchronized global activity in developed and emerging economies seem more sustainable, also driving investment and trade. Thus, the latest predictions made by the IMF (IMF WEO, April 2018) estimate that global growth will accelerate, from the 3.1% reported in 2016, to 3.9% in 2018 and 3.6% in 2019.
It is estimated that the growth of developed economies will go from the 1.7% reported in 2016 to 2.3% in 2017 and 2018, and that their internal demand will increase in a context where the private de-leveraging phase is already advanced and tax policy is generally more expansive. As such, improving prospects are helping the drive in private consumption brought about the recovery of business investment, after a scarce dynamism in previous years.
Within this group of economies, the United States' showed a notable surge, from 1.5% in 2016 to 2.3% in 2017, in line with expectations outlined at the start of the year. Economic activity in the Eurozone also bounced back at a higher rate than expected, expanding by 2.3%; supported by the reactivation of credit and improved exports. Spain does not only maintain growth above that of the Eurozone (3.1% in 2017), but also seems to have strong economic growth. In this way, despite the solidity of internal demand, the current account balance remains in positive which makes it more competitive. Growth in Japan also accelerated to 1.7%. The United Kingdom was the main exception to this trend improvement among advanced economies, with growth falling from 1.9% to 1.8%, because of the effect of the devaluation of the pound on the purchasing power of homes. This overcompensated for the increased dynamism of exports and business investment.
The surge in emerging economies from 4.4% in 2016 to 4.8% in 2017 was caused by increased dynamism in China, and particularly in countries exporting raw materials in an environment of some recovery of raw material prices and capital inflow returns.
One of the biggest surprises of 2017 was that accelerating activity was not reflected in inflation, which was very contained. This made it possible for the economic policies of developed countries to remain accommodating, expecting a very gradual normalization. As a result, the global financial conditions stayed lenient, supporting activity.
Finally, throughout 2017, the gradual devaluation of the dollar in a context of improving global activity accompanied a certain restoration of the balance. It marked the best improvement of prospects in areas outside of the US, especially Europe; among expected growth of fiscal and external deficits for the US economy. The weakening of the dollar also stimulated the global economy. On the one hand, it improves the solvency of government and companies that owe debt in dollars; enabling emerging countries to continue receiving capital flow, and maintain an accommodating financial policy. On the other hand, as many prices are referenced in dollars, this reduces the value of the local currency. As with crude oil, this increases demand.
These global trends are expected to continue in 2018. The baseline scenario expects global growth of 3.9% in 2018, with improvements in emerging economies which produce raw materials; and the United States, largely resulting from the fiscal impulse. However, there are uncertainties about this baseline scenario. The protectionist tone of the Trump administration could lead to a commercial war which would halt the recovery of trade and activity. Geopolitical and social tensions are even more relevant, reflecting society's growing discontent, and making way for increased support of populist and separatist parties. In addition, an important challenge will be for central banks of developed economies to make progress in removing prevailing stimuli, which include unconventional measures; without causing a sudden correction of the financial markets.