Uncertain times: Four major trends in energy amid speculation over oil demand, prices

Uncertain times: Four major trends in energy amid speculation over oil demand, prices
Todays oil and gas markets provide fertile ground for speculation. Questions over peak oil demand, the prolonged supply-demand imbalance in oil markets and whether global capital investment is sufficient to discover new sources of energy are all in play. Despite a loose consensus on many of these topics, new technologies and policy shifts have created uncertainty in everything from oil prices to energy demand.

The Paris-based International Energy Agency released its monthly oil report Wednesday, following a major annual report from the Canadian Association of Petroleum Producers and BPs annual energy statistics survey the day before. Here we underscore some of the most pertinent trends in energy addressed in the reports.

U.S. producers learn as they go

Rig productivity in the U.S. has outpaced expectations as drillers become more familiar with their subsurface geology. That has led to more barrels flowing through U.S. wellheads despite a plummeting rig count.

For example, rig counts in the Permian, a shale basin that spans northern Texas and southeastern New Mexico, have fallen in recent years. Yet production from the region has seen impressive growth, rising by roughly 1.4 million barrels per day in the past five years. Put differently, a rig operating in the Permian today is equivalent to more than three rigs at the end of 2014, BPs chief economist Spencer Dale wrote in the companys annual report.

Rapid growth in U.S. shale plays, particularly the Permian, have deeply impacted global oil prices, and have so far neutralized efforts by the Organization of Petroleum Exporting Countries to curb supplies and lift prices. Although analysts say production growth in U.S. shale basins is not enough to swamp global supplies, investors remain cautious. Prices for benchmark crude West Texas Intermediate fell over three per cent Wednesday on lower-than-expected draws from U.S. inventories, down to around US$44 in the afternoon session.

Oilsands investment dips (again)

Lower prices have led to lower capital investment by Canadian oilsands players in recent years. CAPP sees investment in the oilsands in 2017 topping out at $15 billion, down from $34 billion in 2014, marking the third consecutive drop in annual spending.

The association points to a raft of reasons for this drop in spending, including lower oil prices, the cumulative impacts of several policy changes in Canada including a carbon tax and pipeline constraints.

Oilsands production is expected to grow in coming years, as projects that were commissioned years ago begin to come online. The IEA expects Canadian oil production to grow by 225,000 bpd in 2017, and another 195,000 bpd 2018, most of which is due to increased production in the oilsands.

But five years out estimates become far less certain. Companies are particularly concerned about a lack of export capacity in coming years if major pipeline arteries are blocked. Only with better market access can Canadian crude oil resources compete globally and receive full value, CAPP says in its annual oil forecast. Canadian Prime Minister Justin Trudeau approved Kinder Morgans Trans Mountain expansion project in late 2016, and TransCanada Corp.s Keystone XL pipeline could go ahead if it is approved by state regulators in Nebraska.

India becomes a wildcard

The IEA expects oil demand to advance 1.3 per cent in 2017, and to continue at roughly that pace for many years, in large part due to an expected rise in oil demand in India. The country of 1.3 billion is seeing a massive chunk of its population move from the lower to the middle class, a shift that is expected to create a spike in energy demand as more people drive cars and use more household appliances. India is more or less framed as being to oil markets what China was in the early 2000s.

But a recent proposal by Indian policymakers to ensure that all new vehicles sold by the year 2030 must be electric has caused some to question longer-term demand forecasts. Others say the policy is far too ambitious to be met. Either way, it will be some time before any policy will curb Indian oil demand, which is expected to grow 200,000 bpd in 2017 to nearly 4.5 million bpdor about five per cent of global consumption.

The focus on India is part of a broader concern over oil demand. Royal Dutch Shell Plc sees oil demand peaking as early as 2025 (though the company has also shifted its corporate focus toward natural gas), while Frances Total SA sees demand peaking in 2040. U.S. major oil companies like Chevron Corp. and ExxonMobil Corp. dont foresee a peak in demand before 2040.

Global carbon emissions level off

While the size of the oil market grows every year, and fossil fuels remain dominant, carbon emissions have flattened. Emissions from energy consumption grew just 0.1 per cent in 2016; the period from 2014 to 2016 had the lowest three-year average in CO2 emissions growth since 1981-1983.

That was partly due to falling consumption. Energy consumption growth increased only one per cent in 2016, compared with nearly two nearly per cent growth between 2005 and 2015, according to BP. That downward trend is mostly a result of falling oil consumption in China, as GDP growth slows and as the country shifts toward a more consumer-centric and less primary industry-focused economy. The country is also by far the biggest investor in clean energy, and contributed 40 per cent of global renewables growth in 2016.

But it is also points to a much more pervasive yet less talked-about trend: rising energy efficiency. Where in the past oil demand growth was almost inseparable from GDP, analysts now believe oil consumption may have decoupled from economic growth. That is partly due to a shift toward renewable energy, as well as increasing efficiency in everything from household appliances to internal combustion engines.
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