S& P Global Platts: Oil and Gas Out­look 2017

DEMM Engineering & Manufacturing - - NEWS -

S&P Global Platts, the lead­ing in­de­pen­dent provider of in­for­ma­tion and bench­mark prices for the com­modi­ties and en­ergy mar­kets, of­fers an over­view of the key trends and themes to watch for in 2017. Be­low is fo­cused on the global oil and gas mar­kets.


The first OPEC-led global pro­duc­tion cut in 15 years un­der­pins an emerg­ing but frag­ile re­cov­ery, with 2017 set to see a huge stock over­hang dis­ap­pear by the third quar­ter and the oil mar­ket move from over­sup­ply to a more bal­anced sup­ply/de­mand sit­u­a­tion, ac­cord­ing to Platts An­a­lyt­ics.

With Saudi Ara­bia and Rus­sia join­ing forces to cut out­put by al­most 800,000 b/d in the first six months of the year, and other oil pro­duc­ers un­der pres­sure to com­ply with their share of cuts to bring the to­tal close to 1.8 mil­lion b/d, there re­mains a great deal of optimism in some quar­ters that the pace of re­bal­anc­ing will be ac­cel­er­ated; in oth­ers, there is scep­ti­cism that OPEC and its nonOPEC as­so­ciates can re­ally de­liver.

Just how fast the mar­ket re­bal­ances will de­pend on the dis­ci­pline to en­force and main­tain the cuts across a dis­parate group of oil pro­duc­ers, es­pe­cially with cri­sis-rav­aged OPEC mem­bers Libya and Nige­ria ex­empted from the agree­ment, but with the po­ten­tial to see large ad­di­tions in out­put.

More­over, the speed of re­turn by US shale pro­duc­ers could ul­ti­mately keep a lid on prices. Most oil com­pa­nies ap­pear gen­er­ally op­ti­mistic that prices will rise to a more sus­tain­able level in 2017, but spend­ing is likely to stay mod­est for now and pro­duc­tion growth mod­er­ate. Cau­tion is likely to dom­i­nate the North Sea oil in­dus­try, with a mini-re­vival in pro­duc­tion in the last two years jux­ta­posed against years of de­cline since pro­duc­tion peaked in 1999.

Paul Hickin, Oil Edi­to­rial Di­rec­tor, S&P Global Platts: “The next few years will be shaped by the re­la­tion­ship be­tween US shale and OPEC, Rus­sia and other key oil pro­duc­ers. This land­mark agree­ment be­tween OPEC and non-OPEC is pro­vid­ing a floor to oil prices and US shale is pro­vid­ing the ceil­ing. Com­pli­ance to the deal un­til the stock over­hang dis­ap­pears, most likely by the third quar­ter of 2017, ac­cord­ing to Platts es­ti­mates, will be piv­otal to en­sur­ing the price floor holds, while the speed of re­turn of US shale will de­ter­mine how low the ceil­ing be­comes.”

Re­flect­ing large pro­duc­tion cost re­duc­tions and pro­duc­tiv­ity gains, Platts Well Eco­nom­ics An­a­lyzer es­ti­mates that if US crude bench­mark West Texas In­ter­me­di­ate reaches $65/b, lead­ing US pro­duc­tion ar­eas have an in­ter­nal rate of re­turn of be­tween 35 and 40 per­cent. The Per­mian Basin could be the big­gest ben­e­fi­ciary of ex­pected dou­ble-digit in­creases in cap­i­tal bud­gets in 2017. Platts An­a­lyt­ics fore­casts that pro­duc­tion in the West Texas/New Mex­ico basin will reach 2.226 mil­lion b/d in 2017 up from slightly be­low two mil­lion b/d in 2016.

An in­crease in US crude pro­duc­tion and a wider WTI-Brent spread since the end of 2016 are rais­ing hopes that 2017 will be the year when US crude ex­ports see a marked in­crease.

For the third year in a row, In­dia’s oil de­mand growth will out­pace China’s. Platts An­a­lyt­ics is fore­cast­ing a seven per­cent rise to 4.13 mil­lion b/d in In­dian oil de­mand in 2017, com­pared with a three per­cent rise in Chi­nese oil de­mand to 11.50 mil­lion b/d.

China’s in­de­pen­dent re­fin­ers, which had emerged as in­creas­ingly sig­nif­i­cant im­porters of crude, are fac­ing un­cer­tain times. China has re­moved in­de­pen­dent re­fin­ers from its oil prod­uct ex­port quota al­lo­ca­tion, which should see in­de­pen­dents’ crude im­ports fall sharply. These chal­lenges are likely to un­der­mine the in­de­pen­dent re­fin­ers’ prof­itabil­ity and slow in­creases in re­fin­ing ca­pac­ity. For the wider mar­ket, the trend to fol­low is the move to­wards im­port­ing sweeter crudes with lower sul­phur notably from An­gola, the North Sea and pos­si­bly the US.


The big ques­tion for the gas mar­ket in 2017 is whether strong signs of the emer­gence of a truly global gas mar­ket, ev­i­denced by a large de­gree of price con­ver­gence be­tween re­gional mar­kets in 2016, will evolve fur­ther. Tra­di­tional pric­ing in in­ter­na­tional gas trade has been based on oil in­dex­a­tion, but the oil price roller­coaster of the last few years, in­creas­ing LNG pro­duc­tion and grow­ing com­pe­ti­tion be­tween LNG and pipe­line gas have led to a re­think. The trend for dein­dex­a­tion to oil is likely to con­tinue in 2017.

This is il­lus­trated by the emer­gence of the Ja­pan Korea Marker (JKM) as a re­gional bench­mark for LNG de­liv­ered into Ja­pan and Korea. The marked in­crease in liq­uid­ity for swaps based on JKM prices is in­dica­tive of a mar­ket need for a pric­ing mech­a­nism more re­flec­tive of the spe­cific sup­ply/de­mand bal­ance of the gas mar­ket, one that of­fers more ef­fec­tive risk man­age­ment op­por­tu­ni­ties.

Platts An­a­lyt­ics fore­casts an in­crease in LNG pro­duc­tion in Asia to 127 mil­lion mt/year for 2017, up 16 per­cent on 2016, led by in­creased ca­pac­ity in Aus­tralia, while com­mis­sion­ing of the world’s first float­ing LNG plant in Malaysia her­alds new global op­por­tu­ni­ties for LNG pro­duc­tion. Nev­er­the­less, Asia will con­tinue to be a net LNG im­porter as de­mand across the re­gion

is fore­cast to grow six per­cent to 195 mil­lion mt/year in 2017. While de­mand in the large, ma­ture Ja­panese and Korean mar­kets is likely to re­main flat, Platts An­a­lyt­ics ex­pects China and In­dia to boost their im­ports of LNG re­spec­tively by 28 per­cent and 38 per­cent.

As LNG pro­duc­tion ca­pac­ity con­tin­ues to ex­pand rapidly, par­tic­u­larly in the US and Aus­tralia, Platts An­a­lyt­ics fore­casts an in­evitable global LNG sur­plus that is ex­pected to last un­til 2024. Some of this sur­plus is ex­pected to find buy­ers across Asia, as the re­gion is in struc­tural deficit and pric­ing con­di­tions re­main eco­nom­i­cally vi­able.

In the US, the march to­wards a glob­al­is­ing gas mar­ket means grow­ing pipe­line ex­ports to Mex­ico and ris­ing LNG ex­ports to Latin America, Asia and Europe. Platts An­a­lyt­ics es­ti­mates US gas pro­duc­tion will re­sume its growth and hit 74.7 Bcf/d in 2017, up 2.5 Bcf/d on 2016, while tighter re­gional mar­ket con­di­tions, thanks to grow­ing ex­port op­por­tu­ni­ties and stronger do­mes­tic de­mand, should lead to higher prices.

In Europe, the avail­abil­ity of – and grow­ing ac­cess to – LNG im­ports has led to a mar­ket share of­fen­sive by tra­di­tional pipe­line sup­pli­ers. Rus­sian gas sup­plies to Europe, which hit an all-time high in 2016, are ex­pected to be strong again in the first months of 2017 as buy­ers look to max out their take-or-pay vol­umes ahead of a likely rise in oil-in­dexed con­tract prices. Fall­ing do­mes­tic Euro­pean sup­ply from Nor­way, UK and the Nether­lands means a grow­ing sup­ply gap that will need to be filled, mainly by LNG and Rus­sian gas. More­over, coal-to-gas switch­ing, and the clo­sure of coal plant in Europe, should pro­vide a boost to Euro­pean gas de­mand.

Ross McCracken, Man­ag­ing Ed­i­tor of Platts En­ergy Econ­o­mist, S&P Global Platts: “2016 saw sig­nif­i­cant price con­ver­gence in the gas mar­ket and the strength­en­ing of the JKM to­wards end-year is likely to prove tem­po­rary. The grow­ing sur­plus of LNG, com­bined with the de­sire to burn cleaner fu­els, cre­ates pos­i­tive con­di­tions for coal-to-gas switch­ing in 2017. In turn, this could pro­vide the ba­sis for more sus­tained growth in world gas de­mand and even­tu­ally an­other round of in­vest­ment in the global LNG sec­tor.”

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