S&P Director of Analytics: Energy Sector Balanced on a Knife Edge
From the prolific shales of the Permian to the prevailing peace within OPEC, the global oil industry seems to have come to a place of balance after years of severe boom and bust.
But Chris Midgley, global director of analytics at S&P Global Platts, cautioned that “the industry is on a knife edge. OPEC has far less spare capacity than ever, and U.S. shale producers are only cash-flow positive on half-cycle economics.”
He was the keynote speaker at the annual S&P Global Energy Outlook Forum December 7 in New York. While oil and gas were the centerpieces of the event, the agenda was comprehensive, with presentations on nuclear, renewable energy, and utilities as well.
“All of the energy sources are going to play important roles over at least the next 20 years: oil, gas, renewables, even coal,” said Midgley. Some of that big picture seems to have been missed lately with “the focus just on electric vehicles [EV] and OPEC’s efforts to rebalance the global markets.”
While acknowledging that “the EV story is a long-term story,” Midgley noted that only about a million electric vehicles will be sold this year, in contrast to 80 million conventional vehicles.
That equates to a reduced crude demand of only 30,000 barrels a day.
“The world is going to get to 100 million barrels a day of demand even with electric vehicles and greater efficiency.”
The rare sustained consensus limiting supplies from OPEC has been deserving of the attention it has gotten, Midgley indicated, but he stressed how precarious it is.
“OPEC are playing a tight balance. The objective seems to be keeping oil prices as high as possible while sustaining demand.”
The contrast would be keeping prices as low as possible while still sustaining production. The choice between the two recapitulates Midgley’s assertion that demand is expected to continue growing. Thus keeping prices low to stimulate demand is not the current mandate.
Notably, Midgley believes that OPEC has come to accept North America shale as a viable long-term global source.
“I don’t buy that OPEC was trying to crush U.S. production,” he stated. “There was over-investment at $100 a barrel.”
And while those days now seem a distant memory, Midgley suggested there is further rationalization possible shale.
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