Energy in Transition

Converging Streams Prompt Production Questions

By Matthew Bey, Stratfor

The global energy sector is in a period of multiple overlapping transitions that are providing challenges and risks – as well as opportunities – to those involved in the industry.

This constant flux will remain the status quo for the near future as technological, economic and political risks continue to mount.

In the short-term, the oil market itself will be driven by Saudi Arabia, and the U.S. U.S. crude oil production is now above 12 million barrels per day, or b/d, and is expected to average 13 million b/d in 2020. This will continue to apply bearish pressure on the global oil market.

But the Trump administration’s sanctions on Iran and Venezuela will work in the opposite direction. The U.S. has effectively made regime change its preferred outcome in both cases, and by the end of the year sanctions on both countries could take another 500,000 b/d off the market.

But the biggest driver of whether or not oil prices will be bearish or bullish will continue to be Saudi Arabia. Riyadh has made a determination that propping up prices by reducing supply is necessary in order to maintain high government spending on its long-term Saudi Vision 2030 program. It will continue to be proactive in managing oil markets, deepening or extending production cuts as necessary to ensure oil prices remain stable or increase slightly.

Long-term, however, Saudi Arabia is facing a critical question. As the U.S. becomes a net exporter of crude oil, will Aramco find it necessary to continuously take barrels off the market in order to prop up prices? Investment for a lot of oil plays globally makes sense at US$60 per barrel or higher. Saudi Arabia’s strategy may be untenable in the longer-term should oil markets continue to soak up shale oil produced by the U.S.

Troubles Downstream

The downstream market is also dealing with its own challenges. First, the International Maritime Organization’s 2020 sulfur content in marine fuel regulations go into effect by the end of this year. It is not yet fully clear how the tightening of sulfur dioxide emissions exactly will impact the careful balance between various refined products, refiners’ intakes of crude grades or the energy industry more broadly. Heavy crude oils with high sulfur content will see their relative value decline, but this is precisely the oil U.S. sanctions are targeting and that Saudi Arabia is taking off the market.

Second, the market for lighter products like plastics is now becoming oversaturated, while diesel and gasoline demand continues to grow. The type of crude produced by shale oil formations – light crude – is beginning to outstrip refining capacity of light ends. This has already become the case in the U.S. and will extend globally as production increases.

All of these forces upstream and downstream will keep the oil and gas industry in flux over the next five years. And beyond that the impact of renewables will keep the overall energy industry in flux for longer.  

Matthew Bey serves as a senior global analyst at Stratfor. Bey focuses on political and economic issues globally, including international trade, global finance and commodity developments.

Image credit: Shutterstock