Oil Prices – What are the main drivers?
There is much talk over what is behind the low prices and where the market is going. At TFG we see that there is rising energy demand and supply pressure.
What is predicted?
It’s predicted that in 50 years time, the global population will reach 9.5 billion, 75% of whom will be living in cities (2.5 billion more than today).
Hundreds of millions of people will rise out of poverty, with higher living standards and energy consumption will increase. Energy demand is estimated to soar by 150% in the next 50 years.
On the other hand, it is questioned how this will tie in with the COP21 global objectives of reducing carbon dioxide (CO2) emissions to a quarter of today’s levels by this time, in order to mitigate the risks of being affected by serious climate change.
What is the trend?
It is predicted that energy demand will continually grow and this will be driven by population and macro economic activity. Growth will be fuelled by demand from emerging markets with oil and natural gas use increasing.
Oil – Should we cut off investment?
New production capacity is always needed and if we don’t invest, then it is estimated that supply will fall by 8% year on year. Oil production in developed markets (such as the USA) is facing a slow, long term decline under strong efficiency drivers, but this is underpinned by steady growth in emerging markets.
What are the problems in oil and gas markets?
The oil and gas industry has been rife with difficulties in recent years, which has been seen by many due to the Saudi Arabia policy change, stock surpluses, and little spare capacity. Lower prices seemed to have remained for longer than anticipated due to the fragility of the global macroeconomic outlook and the cost deflation.
It seems like due to a decline in demand and also in mature fields, it’s unlikely that we will see the investment required to allow oil prices to recover and enable the higher cost of supply.
As a result of this, there has been large scale deferral of oil projects, a reduction in capital expenditure within larger corporates, and renegotiation of contracts. Opec reductions have meant that there will be a rethink of supply line finance for oil projects and general divestment in Opec.
Despite strong growth in renewables for electricity, more gas is needed for other sectors. Electricity is 20% of overall energy use and a third of the overall natural gas use is in electricity generation.
What are the oil companies doing?
Many oil companies are trying to increase gearing and invest through the cycle. Therefore successes and failures have been polarised. The stronger companies are investing for the long run and weaker players are going through debt restructurings.
45 companies have filed for Chapter 11 with debts of around US $16 billion, but the net effect has been small as bond holder seize assets and carry on the business.
If you are a commodities importer or exporter looking to restructure debt finance or explore trade finance options, get in touch with our structured trade and commodity finance team, or find out more about structured trade finance here.