As a volatile 2014 winds to a close, Wood Mackenzie has drawn on the knowledge of senior analysts to compile a new report, Horizons: What to look for in 2015.
“Oil market concerns will be inescapable in 2015,” explained Paul McConnell, principal analyst for global trends at Wood Mackenzie and author of the report. “With no sign that OPEC is reconsidering its decision to leave production targets unchanged, the impetus falls on non-OPEC producers to limit supply growth and bring the market back into balance.”
Weaker than expected global economic growth could put even more pressure on prices. Oil companies will be forced to adapt, and a buyers’ market could emerge in 2015. However, those best positioned to withstand weak prices could emerge as winners when the cycle turns.
Elsewhere, China remains a focus. “There are signs that this critical driver of energy and metals markets over the last decade or more is beginning to mature, with far-reaching implications for commodity demand,” McConnell noted. In 2015, the behavior of the country’s consumers, the strength of the economy and the policy direction taken by the government will set the scene for energy and metals demand growth over the medium term.
According to Wood Mackenzie’s analysis, below are the key themes to watch for in 2015:
- Oil markets: Struggling to find balance in 2015 – The strength of oil demand growth in 2015 is a major concern, and a weaker than expected economic outlook could exacerbate the current market imbalance. If a non-OPEC supply response is not enough to rebalance the market, then attention will fall on the Middle East, and OPEC’s next meeting, during the summer months. Oil market rebalancing in 2015 is likely to deliver price volatility and a period of uncertainty.
- Corporate: A true buyers’ market could emerge in 2015 – Corporate valuations are now heavily discounted, as investors digest a sub $70 per barrel oil. Companies are weighing up options and distressed sales could precipitate the emergence of a buyers’ market in 2015. Those with the financial strength to withstand weak prices will be well positioned for the next cycle.
- Macroeconomics: Asia’s consumers are key – China’s economy is evolving and the nature of its energy demand growth is changing. A more rapid than expected shift to consumption-led growth could slow energy demand. In Japan, consumption needs to accelerate to kick-start GDP growth and alleviate the risk of a sovereign debt crisis. In 2015, the behavior of Asia’s consumers will have material impacts on the global economy.
- Coal: China’s shift to cleaner consumption – A twin-pronged approach to environmental protection and support for domestic mining companies means a shift to cleaner coal consumption and a reduction of seaborne imports. Details of the 13th Five-Year Plan will become clear in 2015, but are likely to accelerate the drive toward a more sustainable China. Such policies could mean further damaging impacts on global coal producers.
- Metals and mining: China’s Five-Year Plan indicates commitment to infrastructure build – Metals and mining are highly exposed to China, which is the primary driver of demand growth for many mined commodities. Details of the 13th Five-Year Plan will indicate China’s commitment to infrastructure build-out over the medium term, and will be key for the mining industry to position itself for the next phase of the country’s growth.
- Natural gas: LNG suppliers hoping for cold – Slowing gas demand growth has led to concerns that China will struggle to absorb contracted LNG, which will double over the next three years. Suppliers will be hoping for a cold 2015, but the background of a low oil price environment will place pressure on LNG prices. However long-term growth prospects remain compelling, and Russia will continue to cement its pivot east with China gas deals.
- Global trends: Will Paris 2015 mark a turning point? – China and the US have agreed emission targets, suggesting that efforts to reduce carbon-dioxide output may now come more easily than expected. Europe is seeking to solve the problem of dependency on Russian natural gas with greater energy efficiency and more renewables. Regardless of collapsing oil prices, could the world already be on a path towards falling hydrocarbon demand?
Longer term, Wood Mackenzie emphasizes that deep-seated geopolitical, economic, and technological trends may point to a new era of weak hydrocarbon demand growth.
McConnell added, “Such a scenario represents a high-impact tail risk for energy companies in the years to come.”