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Oil Prices

 

Extracts from a weekly briefing by Ed Crooks: January 6, 2017

In our predictions for 2016, we were right that oil would end the year over $50 – modesty forbids me from mentioning which writer made that forecast – but missed that an agreement between Opec and non-Opec producers would be one of the factors underpinning the price. For 2017 Anjli Raval made the call, arguing that crude was again likely to end the year above $50, on the grounds that a lower price would still be too low to enable sufficient investment in production to meet demand.

The outlook for oil remains one of the big uncertainties facing financial markets in 2017, however. We have a lot to learn about how far large producing countries will comply with their pledges to curb production, how quickly US shale output will respond to the upturn in activity that began last year, and how far Libya and Nigeria, not bound by the Opec limits, will be able to recover from disruption to their industries. One likely constraint on US shale production will be rising costs, as suppliers seek to rebuild some of the profit margins that were crushed during the downturn.

More formal projections of the energy outlook came from ExxonMobil last month, and the US Energy Information Administration this week. One of the key points from Exxon’s Outlook for Energy is that it expects all the growth in world energy consumption to come from emerging and developing economies. Total energy use is expected to be roughly flat in the OECD member countries out to 2040, but to rise 40 per cent in non-OECD countries. The EIA Annual Energy Outlook gave an indication of what that would mean for the US, predicting that energy use for transport would peak in 2018, and decline steadily to 2034, driven in part by higher fuel economy standards. With oil and gas production expected to resume their upward progress, the EIA thinks the US will become a net energy exporter in the next ten years or so. Thomas Covert had a good piece at Forbes explaining how the EIA’s forecasts have been wrong in the past, principally by missing changes in production technology and exploration success, which are inherently very difficult to predict.

Another key uncertainty looming over 2017 is how far and how fast President Trump will realise his plans to increase fossil fuel production in the US. The American Petroleum Institute set out a wish-list for his strategy, including opening more of the US coastline for offshore drilling, supporting the construction of new pipelines, and cutting federal regulations including curbs on methane leakage. The Washington Post sketched out the mechanics of rolling back some of President Barack Obama’s regulations on energy and other industries, and identified a few prime targets, including those methane rules. Brad Plumer at Vox debated the question of what the Trump administration would mean for efforts to address the threat of climate change.

With President Trump also likely to favour easing off on government support for renewable energy, China looks set to consolidate its position as the world leader in the industry. The urgent need for cleaner sources of energy in China has been demonstrated in the past couple of weeks by the shocking smog in large parts of the country that has become dubbed “the airpocalypse”.

Quote of the week

“Hydraulic fracturing makes a huge difference… If you had policy that changed relative to hydraulic fracturing, it would make a big, big difference to everything that’s in here. It would make a difference to production, it would make a big difference to imports” – Adam Sieminski, administrator of the US Energy Information Administration, discussing the importance of fracking in projections that the US will be a net exporter of energy in the next ten years.

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