1. OPEC Secretary General and Upcoming Meeting
Helima Croft, Global Head of Commodity Strategy at RBC Capital Markets, explained that there is increasing pressure within OPEC. Venezuela, which occupies the presidency this year, is currently under U.S. sanctions, as is Iran, which continues to see exports fall. Meanwhile countries like Saudi Arabia have signaled that they are willing to step in and take Iran’s market share. For Secretary Barkindo, it’s essential to demonstrate that OPEC is an organization that’s not so politically dysfunctional that they can’t meet and take action.
One month ago in the run up to OPEC’s Joint Ministerial Monitoring Meeting in Jeddah, there was pressure on the Saudis to increase production and the big question was whether they’d go up to their quota. Now, however, given current prices and in the face of a sell-off due to Washington policy action, the incentive for the Saudis to announce they’ll go up to quota isn’t there. Expect the Saudis to say they are committed to seeing this through and that they can swing both ways, and there will be stronger signals coming from Saudi Arabia that they are going to be aggressive in rebalancing the market. With their budget breakeven remaining high and fiscal imperatives for domestic political reasons, they will want prices to move much higher than they are now.
Russia’s role is also noteworthy. In the run-up to virtually every meeting, the Russians have raised concerns about the agreement, but have ultimately approved and actually taken an important role in brokering the agreement. This gives Russia a very important seat at the table and these actions have allowed Putin to gain substantial soft-power influence and increased Russia’s reputation on the world stage.
2. Global supply and demand
Michael Tran, Managing Director & Energy Strategist at RBC Capital Markets, pointed out that General Secretary Barkindo was keen to say that OPEC will be committed and nimble in the face of volatility. It’s a fluid and bifurcated market; on the one hand the financial markets, affected by macro events such as increasing trade tension, are driven by investor concern and can’t move higher, while on the other hand, we have the tightest physical market in years. Many consider the market to be artificially tight given that OPEC cuts, supply outages and strong Asian buying have been contributing to the tightness, and these variables will have to continue to play out for the world to not become oversupplied again. A recession, escalating trade war rhetoric and President Trump present risks to the downside through the balance of the year.
The past couple of months have seen ferocious stock builds in the U.S, which has ignited a bearish wave of sentiment that has engulfed a market that many previously thought to be the tightest global physical market in years. Globally speaking, 93% of global stock build-up has been driven by China, South Korea, Japan and the U.S., despite the market reaching a point of massive backwardation. This is less concerning given that major consuming Asian countries are shoring up barrels for energy security purposes. This is driven by concerns around geopolitical instability and energy security.
Presently, nearly two-thirds of global oil demand is driven by China and India. Adding in the rest of the emerging Asian economies increases this figure to 80%. In other words, the demand side of the equation is fraught with concentration risk. China’s evolution is key and factors such as the rising middle class and structural changes in demand for motor and aviation fuels, which we see as structural game changers, but slowing GDP growth presents a clear and present danger for the market over the immediate term.
3. Shifting geopolitical landscape
Iran
Looking at the geopolitical picture, Helima Croft believes that Iran is one to watch. The sanctions imposed have had a significant impact on Iran’s economy and, despite U.S. attempts to de-escalate tensions in the country, the situation remains provocative and volatile. The key date to watch is July 7; this is the day that the 60-day deadline Iran gave to the Europeans to find a work-around arrangement in order to allow them to sell their oil and do banking transactions expires.
Libya and Nigeria
Meanwhile, recent political and security events in both Libya and Nigeria could have an impact on output. Libya’s oil production is holding up but there is doubt over its long-term sustainability. Its oil production and energy infrastructure is exposed to volatility and is acutely at risk. This continued potential volatility needs to be fed into OPEC’s planning and will require them to be nimble. However from a market perspective, there has been little impact to date.
Nigeria’s oil production has also held up incredibly well despite problems in many of its oil states around the recent elections. However, there are worrying trends, including trouble at pipelines, fires on the fields and an increase in kidnappings. There’s a thin line between criminality and militancy and any sign of avenger-style attacks could signal the start of potentially longer-term outages.
Venezuela
The situation in Venezuela has quickly moved from a humanitarian crisis to the imposition of sanctions by the U.S. and an unexpected escalation. The coming weeks will prove significant in understanding the solidity of Russian military involvement in the country and even if this is withdrawn and a new liberal leadership emerges, reconstruction and recovery will be a long-term exercise.
Michael Tran agrees, explaining that for the Gulf coast, the on-going situation in Venezuela and a decline in Mexico’s production are creating a reliance on Canadian crude and intensifying the need to open up rail to overcome the problems with egress.
China
Presently, 60% of global oil demand is driven by China and India. If we add in the rest of the emerging economies, this number jumps to 80%. China’s evolution is key and factors such as the rising middle class and structural changes in demand for aviation, and the increasing need for more jet fuel, will unleash further pent-up demand.
4. BPX perspective
Dave Lawler, CEO of BPX Energy spoke about opportunities in the sector. The U.S. is now a significant exporter of both oil and gas and so organizations need to focus on the value chains worth participating in to capture the best value over time. He believes that some of the larger, integrated companies have an advantage in that they have a global presence and have operations across the value chain, with BP having a distinct advantage in developing key assets as one of the top gas and oil traders in the U.S.
On investment strategy, BPX’s operations are solely focused in the Lower 48, however BPX serves as an advisor to BP’s unconventionals operations around the world, such as those in Oman at the Khazzan field.
Technology is materially important in helping to manage assets safely and efficiently, while also maximizing production and reducing costs. Dave believes the disruptive nature of technology is a significant opportunity for the industry, and emphasized the importance of fostering a company culture that’s open to embracing new ideas and innovative solutions.
5. The Canadian energy industry
Jonathan Stringham, Manager, Fiscal and Economic Policy at the Canadian Association of Petroleum Producers (CAPP), was upbeat about the political changes in Alberta, which saw the election of pro-business Jason Kenney and is looking forward to a re-balancing of the economic and environmental objectives of the government.
In terms of natural gas, Ben Brunnen, Vice President, Oil Sands pointed to the appointment of an Associate Minister of Natural Gas and the announcement that the recommendations of a previous report into the industry by the outgoing government will be reviewed by the new administration. Producers are also focused on increasing competitiveness, which includes addressing issues around egress.
From an incremental investment perspective, activity levels are subdued, said Ben. However, companies are advancing their growth plans and there is some investment from a new greenfield perspective. The good news is that costs have come down substantially, breakeven points are lower, and opportunities are worth exploring.
Continued delay on pipeline decisions has shifted crude by rail from a temporary to a more long-term measure. Over the long-term, rail is very scalable. The issues are the incentives offered to industry and also what happens with the curtailment program. The current level of uncertainty and the interaction between curtailment and the rail program means that the risks of investment remain quite high.
Keystone XL has secured a revised presidential permit from Trump and the industry is waiting to see how that moves forward in 2020. In terms of TMX, the deadline is approaching for the results of the consultation with First Nations, but the expectations are positive. In terms of the Trans Mountain Pipeline Expansion, expectations are positive for government approval.
6. Sustainability
Over the last 3-4 years, ESG investing has been an increasing focus for the energy industry, its members and investors.
The Canadian energy industry has a robust and transparent regulatory system, says Ben Brunnen, Vice President, Oil Sands. Members place emphasis on disclosure and reporting and Canada tops the list for ESG relative to other oil and gas producing jurisdictions.
While the global demand for energy increases, companies are spending more capital on technology, which advances the next phase of sustainability while improving the bottom line. This level of innovation will see emissions reduce even in the face of increasing demand, so that the cap on emissions will not be breached.
BPX CEO Dave Lawler stressed the importance of organizations listening to the demands of the world at large, including governments and society. He sees the use of technology as vital to supporting ESG strategy along with a culture of continuous improvement and the ability to adapt. Investment, he says, is needed to create a different way of thinking about the industry’s role in society, for example, viewing gas potentially as a destination fuel rather as a transition fuel.
Jonathan Stringham, Manager, Fiscal and Economic Policy at the Canadian Association of Petroleum Producers (CAPP) agrees that members are reducing their carbon footprint by a range of innovations such as recycling and electrifications. He thinks that all forms of energy are complementary and that meeting the needs of a growing population will require even more synergies between hydrocarbons and renewables.
