Market Update: Oil & Gas - January 2017 | KPMG | OM

Market Update: Oil & Gas - January 2017

Market Update: Oil & Gas - January 2017

OPEC cuts may not be extended beyond first half of 2017.

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The growing dependency of China on foreign energy

Chinese imports of crude oil saw a sizeable increase; with crude inflows reaching 36.38 million tonnes or 8.57m bpd. Similarly, crude import volumes hit record highs of 381 million tonnes for the 2016 calendar year.  China’s dependency on foreign energy is only expected to increase with recent comments from its National Development and Reform Commission (NDRC) indicating plans to progressively reduce "outdated" coal production capacity by 800 million tonnes a year until 2020. Compounding this was the large jump in Chinese coal imports, reversing the strong downward trend of the past four years.

 

"Faced by the recent rise in oil prices and softening of demand for its goods, the balance of China’s economy is being further pushed by the changing political landscape. With China’s President Xi signalling a potential break from its growth target of 6.5 percent, and indications of falling competitiveness of Chinese manufacturers, many will be watching the dynamic between China and her trading partners in the short- to medium-term future. Raw material-supplying countries and companies alike will be monitoring China’s economic growth for any stumbles, as this would likely send downward demand shocks up the energy and commodity value chains."

– Oliver Hsieh, Director, Commodity & Energy Risk Management, KPMG in Singapore

OPEC cuts may not be extended beyond first half of 2017

Widely reported comments by Saudi Oil Minister Khaled al Falih stating that there probably would not be a need to extend the OPEC cuts and agreement with non-OPEC producers beyond the first half of 2017 reinforces our view that Saudi policy aims to put a floor under prices above $50 per barrel, but not to try to drive a rapid push beyond $60 per barrel. While many analysts had assumed that the cuts would be extended through 2017, that combined with the increased refiner demand in the second half would be a sufficiently bullish price scenario to drive a very sharp recovery in US drilling activity in late 2017 and 2018. The Saudis seem to be sensitive to the need to avoid drawing down inventories that rapidly, and prefer a more gradual approach.

 

"There is still some uncertainty around compliance with production cuts due to lags in data availability, but it appears that the Saudi/GCC portion of the cuts will be completely implemented, with only partial compliance by others. Among non-OPEC members, only Oman seems to have fully implemented its commitment. This keeps us on our expected track of a narrow price range for WTI in the low $50s in early 2017 and a gradual push past $60 in 2018."

– Greg Priddy, Director, O&G, Eurasia Group*

 

* Guest contributor to January edition

Pending Government Decisions – South Africa

In broad terms the recent increase in oil price impacts the consumers due to oil being imported, as South Africa is not an oil producing country. This could threaten the inflation in SA that is currently under the 6% target, especially in combination with the Rand weakening further due to any of the other risk materialising.

 

The uncertainties globally resulting from the US election outcome, Brexit and slowdown of growth in China will affect South Africa but it is unlikely that it would significantly affect the economy in general or the energy and natural resource sector in 2017.

 

Big decisions pending by government that could affect the energy and natural resources industry in SA beyond 2017 are nuclear power generation, shale gas extraction in the Karoo, clean fuels II upgrade timeframe, importation of LNG and increase in black economic empowerment requirements. The lead up to and the result of the next presidential election in 2019 could be a big turning point, positive or negative, for SA.

 

"Some of the South African market conditions and risks apply to other Africa countries for example - increase in growth is expected across Africa in 2017 and the risk related to political uncertainty is pervasive across the continent. Decisions makers are cautioned that Africa is a vast continent with over 50 countries and analysis by country and region is required to fully understand the market."

– Alwyn van der Lith, Oil & Gas Lead, KPMG in South Africa

 

The Mechanics of Exemption

On 1 December 2016, the European Commission adopted the long-awaited final draft of the so-called "Ancillary Activities Exemption" which is critical to many corporates and commodity traders who use commodity derivatives in their commercial activities. Firms who cannot demonstrate compliance with the exemption criteria  may need to apply to national financial regulators for permission to continue their businesses in commodity derivatives.

 

"The mechanics of the exemption have been the subject of a long and public tussle between the European Securities and Markets Association (‘ESMA’, the European Union regulator) and the European Commission (the executive branch of the European Union), resulting in a complex compromise solution that offers optionality and scope for interpretation. There is now no reason to delay preparation of the policies, procedures and controls that justify a claim for exempt status. For many firms this work is likely to include a review of commodity price-risk hedging strategies and policies, which will often be decisive in justifying exemption."

– James Maycock, Director, Forensic, KPMG in the UK

Analyst estimates: oil

  2016 2017 2018 2019
November Avg
44.6 57.3 70.1 75.0
December Avg 44.7 57.6 70.0 74.4
November Median
45.0 56.3 70.0 72.5
December  Median 45.0 56.3 67.8 72.5

Analyst estimates: gas

  2016 2017 2018 2019
Min 2.4 2.9 2.9 3.2
Average 2.5 3.2 3.3 3.5
Median 2.5 3.2 3.2 3.5
Max 2.6 3.5 4.0 4.0
 
  2016 2017 2018 2019
November Avg 2.5 3.2 3.3 3.5
December Avg 2.5 3.2 3.3 3.5
November Median 2.5 3.2 3.2 3.5
December Median 2.5 3.2 3.2 3.5

 

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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