Posted June 21, 2018
The API Industry Outlook for the second quarter of 2018 is one of the things that’s new at API. If you follow energy markets, you’ll appreciate an incisive view of the economy at home and abroad as well as markets for crude oil, natural gas and petrochemicals.
Beyond nice-to-know “macro factors,” here are things to know and understand about trade barriers that could affect economic activity and prices where you work and live:
The Bloomberg consensus expectation is for markedly slower U.S. economic growth over the next two years, due to incrementally less boost from tax reform and policies that raised growth today but potentially at a cost in the future.
- This matters because financial market valuations do net yet appear fully to reflect the fact, and economic growth and energy demand have tended to be intertwined.
Elevated Economic Risks
As pressures for price inflation and interest rates have risen – and could be compounded by trade barriers – risks to economic growth have risen.
- Many countries around the world have achieved solid economic growth in concert, based in part on low interest rates and record amounts of debt. The IMF recently highlighted that, if the cycle turns, the risks for financial market volatility have been heightened.
Record Global Oil Demand
According to the Energy Information Administration, global oil demand in Q2 2018 eclipsed 100 million barrels per day (MBD) for the first time. Remarkably, U.S. supply growth has by itself been sufficient to meet virtually all global oil demand growth, which the EIA estimates was 1.8 MBD y/y and suggests the U.S. more than compensated for declines in other regions.
- Strong economic growth has resulted in record oil demand. This is a relationship that the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and others underestimated coming into this year, as they expected relatively little demand growth from advanced economies globally. For example, through the first five months of the year, U.S. petroleum demand was more than 600 thousand barrels per day (KBD) above the same period in 2017. The largest single product was gasoline, and its demand for the first five months of the year was the highest on record since 1945, despite prices that had risen.
- As of May, U.S. petroleum supply had risen by more than 2.0 million barrels per day (mbd) since the same month last year, and since the beginning of January the U.S. has added 138 rigs (a 14.6 percent increase).
- Oil prices have risen this year and are influenced by myriad market-based factors, including supply, demand, inventories, and geopolitics – current assessments as well as expectations. With inventories having fallen since last year, the market has had less of a cushion than it did for the past few years.
- U.S. petroleum inventories normally accumulate during the month of May, but that didn’t happen this year for only the third time since 1956. Some people might attempt to blame U.S. crude oil exports, but that blame would be misplaced. U.S. crude oil inventories accumulated in May on par with their median rate (0.3 percent) since 1956, so it was mainly about the strong demand for refined products. That’s a good problem to have because it means that consumers and businesses have thrived with solid employment conditions, wage growth, and sentient that has enabled their livelihoods and supplied the fuels and materials that enhance modern society.
Whereas strong oil demand and lower inventories have raised oil prices since last year, the EIA expects the global oil supply/demand balance to shift back to a surplus position beginning in Q2 2018 without changed output by OPEC.
- After a strong start to the year, some moderation of U.S. oil demand growth became evident through the first five months of 2018. The EIA’s Short-Term Energy Outlook (STEO) suggests that U.S. and global oil demand could moderate over the course of the year – while they expect U.S. and global oil supply to remain solid or grow.
Even as U.S. natural gas exports rose to 2.8 billion cubic feet per day (bcf/d), market supply remained strong and prices were low. Canadian natural gas has been under pressure.
- A concern many consumers have had is whether natural gas prices would rise along with exports of liquefied natural gas (LNG). With exports having risen by 1.0 bcf/d since Q2 2017, domestic natural gas prices have fallen (to less than $2.80/mmBtu), reflecting that most exports generated new production that was not needed domestically. This has contributed jobs, investment and economic growth to many communities across the United States. Yet, while U.S. natural gas has grown, there has been pain north of the border in Canada, where natural gas from the Western Canadian Sedimentary Basin recently traded at prices as low as $0.20/mmBtu.
Low ethane prices have helped U.S. petrochemical producers, but as new ethane crackers come on stream Bloomberg/Nexant data show that ethylene prices and margins have hit 8-year lows, which means these companies are particularly vulnerable to trade barriers and ethane feedstock costs.
- Having an outlet for ethane feedstock and petrochemical products is an enabling factor for natural gas development. As LNG exports have risen, increasing amounts of natural gas liquids (NGLs) have been taken out of the natural gas that is prepared for export. And natural gas and oil are produced jointly among many areas in the United States. Consequently, policy issues that affect the market access and value of petrochemicals could be important to continued exploration, development and production of U.S. natural gas and oil. All of these things are intertwined.
ABOUT THE AUTHOR
Dr. R. Dean Foreman is API’s chief economist, specializing in energy and global business. With a Ph.D. in economics from the University of Florida, he came to API from Saudi Aramco Strategy & Market Analysis in Dhahran, where he managed short-term market monitoring and the long-term oil demand outlook. Foreman has more than 20 years of industry experience in corporate strategic planning, forecasting, finance / risk management and regulatory policy at ExxonMobil, Talisman Energy and Sasol North America.