In this final column of 2017, we look back at some of the biggest energy stories of the year, and we look forward to what we can expect in 2018.
1. Without a doubt, the most important story of 2017 was the rising price of oil. Analysts and market watchers are not united on what was behind the WTI benchmark’s climb from a low of $44 per barrel in the summer of 2017 to a high of nearly $60 per barrel in December. However, among the contributors were OPEC’s production cuts; steady growth in global demand; faltering production from former oil giant Venezuela; production and distribution disruptions caused by hurricanes in the south-eastern United States; and pipeline closures in the northern U.S., Libya, and the North Sea.
The oil market is likely to remain volatile in 2018. There is still an oversupply of oil and demand from countries like China and the United States is still integral to keeping prices from dropping. We will likely continue to see relatively minor incidents make significant impacts on the oil market.
2. The biggest story in oil equities this year was Royal Dutch Shell’s decision to sell about $30 billion in upstream assets and concentrate its future business on downstream product production rather than oil drilling. Over the past year, Shell (NYSE:RDSa) either sold or looked to sell $587 million in assets in Gabon, $1.23 billion in gas assets in Ireland, $500 million in gas assets in Tunisia, $1 billion in assets in New Zealand. Part of this divestment strategy comes from a need to eliminate “nonstrategic assets” from Shell’s balance sheet. However, Shell’s CEO portrayed the shift as a response to growth in the electric vehicle market and forecasts of “peak oil demand.”
Shell’s decision to invest less money in upstream asset development is emblematic of a divergence among major oil companies that will continue in 2018. Some oil companies (Shell among them) are investing less in asset development and instead seeking value in petrochemicals, renewables, or refining. Other companies, particularly national oil companies like Aramco, are continuing or even expanding their investment in upstream asset development. Oil majors that choose to sell off upstream assets will see higher stock prices, in the short term. However, it is unclear if downstream assets and renewables will yield the kind of profits these companies have traditionally seen with the production and sale of crude oil in times of high oil prices. Look for this divergence to grow wider in 2018.
3. Electric vehicles were a top story this year. Several countries issued mandates designed to decrease the sale of conventional, gasoline burning vehicles and compel their populations to purchase electric vehicles instead. Major car manufacturers, like Volvo (OTC:VLVLY) and Toyota (NYSE:TM) made significant commitments to producing new electric vehicle models. At the same time, EV car company Tesla (NASDAQ:TSLA) suffered setbacks with the rollout of its Model 3 “EV for the masses” car.
Despite optimistic forecasts that predict much higher rates of electric vehicle adoption, the future of electric vehicles is unclear. Problems are already emerging with India’s EV mandate and consumers are learning about the social and environmental cost of lithium mining and battery waste. Unless we see a major technological breakthrough, most car buyers in 2018 will find electric vehicles are not worth the cost.
4. The ban on U.S. oil exports was lifted at the end of 2015, but it took until 2017 to see a noticeable rise in U.S. oil exports. In October, the U.S. exported approximately 2 million barrels per day, which is more oil than the country of Venezuela even produced that month. The U.S. export market has room to grow within the existing infrastructure. Looking ahead to 2018, U.S. oil exports could help alleviate America’s trade imbalance with China. This past November, for example, the U.S. exported a record 289,000 barrels per day to China. That number is a small fraction of the 9 million barrels per day that China imported that month, but U.S. oil producers see room to expand.
5. Venezuela’s oil production continued to decline in 2017 to the point where it can no longer produce enough crude oil to satisfy domestic consumption – let alone its foreign customers. The problems with Venezuela’s oil industry have been accumulating over the past several years, but 2018 could be the turning point. If Venezuela defaults on its loan payments, PDVSA, the national oil company, could be default to its creditors. One of its creditors is Russian oil giant Rosneft (OTC:OJSCY). On the other hand, a revolution or coup in Venezuela could depose President Nicholas Maduro and the new rulers could change the structure of Venezuela’s oil industry entirely.
Look for these stories and more to drive oil markets in 2018. Happy New Year!