Market Update: Oil & Gas - October 2017 | KPMG | GLOBAL

Market Update: Oil & Gas - October 2017

Market Update: Oil & Gas - October 2017

Market Update: Oil & Gas - October 2017

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Oil price as an indicator of the new market equilibrium

Most oil and gas companies seem to regard the current oil price i.e. between $50 and $60 US dollars as an indicator of the new market equilibrium for the foreseeable future. A major oil trader indicated that a further increase in the short term may be possible given that a lot of supply was taken off the market by oil companies not making planned investments over 1 trillion US dollars since the price collapsed1. Experts predict that oil companies will cut their investments in upstream on new oil fields by more than 20% by 20202, compared to the level forecasted until the drop in oil prices. This could noticeably reduce oil supply in the market by the end of the decade.

Currently many market investors and players try to understand the trends in the industry, taking into account controversial data from the different parts of the globe. The recent talks on the potential extension to the production cut deal with the OPEC may also lead to increase in oil prices in the mid-term. This deal has resulted in the pullback of around 1.2 million barrels per day of production generated by OPEC countries and approximately half of that figure by non-OPEC parties already3. At the same time, one should not overlook that recent rebound in production in Libya and Nigeria (both exempt from OPEC's November deal to curb output), which could somehow impact the stock, thus, leading to oil price fixing near the forecasted bottom line.

Anton Oussov, Global Head of Oil & Gas and Head of Oil & Gas in Russia and the CIS, KPMG in Russia

TCFD recommendations

The Financial Stability Board's Task Force on Climate-related disclosures (TCFD) presented its final report in June 2017, setting out recommendations for helping businesses disclose climate-related financial information. Whilst the recommendations are voluntary, it could be considered as a basis on which future legislation could be built and so it would be prudent for executives of oil & gas companies to be pro-active and plan for the future today.

The impact of not addressing climate change risks are clear in the mind of investors as evidenced by recent challenges at shareholder meetings, and is likely to become of increasing importance to regulators, lenders and insurance underwriters alike. Major oil & gas producers have begun to take this on board, with Shell and Total S.A. establishing `New Energy' divisions; Shell is planning on spending $1 billion per year on new energies by 20204, whilst Total have stated their goal of achieving a low-carbon business portfolio weighting of 20% by 20355. Whilst the debate of the impact of climate change on business rages on, we expect that implementation of TCFD recommendations to evolve over time and suggest companies stay abreast of latest developments on climate-related financial disclosures.

– Mohammed Chunara, Associate Director, Energy & Natural Resources, KPMG in the UK

Decertification of Iran nuclear agreement will have limited initial impact on oil market

President Trump announced his decision on 13 October to decline to certify Iranian compliance with the nuclear agreement reached in 2015 during the previous administration, but the initial effect on the world oil market should be modest. The issue of certification pertains to the requirements of US law and does not constitute a US withdrawal from the deal or mandate a reimposition of secondary sanctions aimed at curtailing oil exports. While the action sets in motion a 60-day period for Congress, by a joint resolution requiring majority votes in both houses, to reimpose sanctions, that outcome is probably not going to happen. The Trump administration is not pressing for that outcome, and even hawkish members of Congress have indicated that they do not see this as immediately necessary. Trump has the authority to reimpose those sanctions at any time, and the administration's intention is to attempt to pressure Iran for additional concessions on ballistic missiles, the expiration timeframe of the agreement, and other issues. Despite the perception of risk, the crude oil market will be less inclined to price in a premium for notional risks, given the ability of short-cycle production to respond to market prices quickly. So while President Trump's move to decertify has provided only modest support for oil prices, it has set in motion a period in which there will be a very uncomfortable ambiguity about the nuclear deal's future, as well as short-term volatility on headlines related to the issue.

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

* Guest contributor for October edition

Analyst estimates: oil

  2017 2018 2019 2020
Minimum 51.1 49.3 53.0 57.5
Average 52.8 55.0 58.4 62.8
Median 52.7 54.7 58.9 63.3
Maximum 56.0 65.0 63.0 70.0

 

  2017 2018 2019 2020
August Average 53.2 55.6 60.2 66.3
September Average 52.8 55.0 58.4 62.8
August Median 52.8 54.2 58.2 66.0
September Median 52.7 54.7 58.9 63.3

Analysts estimate: gas

  2017 2018 2019 2020
Minimum 2.9 2.9 2.9 2.9
Average 3.1 3.1 3.2 3.2
Median 3.1 3.0 3.2 3.1
Maximum 3.3 3.7 3.5 3.5

 

  2017 2018 2019 2020
August Average 3.1 3.1 3.2 3.3
September Average 3.1 3.1 3.2 3.2
August Median 3.1 3.0 3.2 3.5
September Median 3.1 3.0 3.2 3.1

Note: The forecasts/analyst estimates above from Brent & Henry Hub are an indication based on third party sources and information. They do not represent the views of KPMG.

Footnotes

1. https://www.cnbc.com/2016/06/15/global-oil-industrys-retrenchment-tops-a-staggering-1-trillion.html 

2. http://www.ogj.com/articles/2016/06/woodmac-global-upstream-investment-down-1-trillion-since-oil-price-slump.html

3. https://www.cnbc.com/2017/09/05/russia-hints-that-opecs-output-cut-could-be-extended-again.html

4. https://www.bloomberg.com/news/articles/2017-07-10/shell-plans-to-spend-1-billion-a-year-on-clean-energy-by-2020

5. http://www.total.com/sites/default/files/atoms/files/integrating_climate_into_our_strategy_eng.pdf

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