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S&P Global and the future of the oil industry

S&P Global

S&P Global and the future of the oil industry. By Ana Paula Ferrer.

With the rapid and impacting changes over the past few months in the world; it is not a surprise that many of us wonder what is next. Analysts from S&P Global took the time to answer some of our questions in the hope that a bit of the uncertainty veil lifts and a clearer view of what will happen in the oil industry is shown.

Firstly, Richard Joswick, Platts head of global oil and analytics, S&P Global Commodity insights; considers that the oil industry is quite resilient; “but changes take time. While those are occurring, there can be price impacts.”

Moreover, the analyst explained that today’s largest geopolitical factor affecting commodity and energy markets in the U.S. and the world, is the reduction in Russian and Ukrainian commodity exports. “Each commodity is different, but we have seen sharp price increases and price volatility as global supplies rebalance.”

Also, he mentions that for oil, the announced release of strategic stocks by the US and other IEA countries expects to help a great deal in covering the anticipated reduction in Russian oil exports. “Crude oil prices have fallen from their recent highs, but volatility is likely until new supply patterns and logistics are worked out.”

The impact of Russia’s invasion of Ukraine

Mr. Joswick explains that the loss of Russian refined product exports has tightened up diesel markets; and that has spillover effects on jet fuel and gasoline, which have all seen increased prices relative to crude oil. This provides refiners with higher refinery margins, allowing them to economically increase production to cover the shortfall. Overall, US refiners are likely to see higher earnings in the second quarter. The tight oil product market conditions in the Atlantic Basin will set the global oil product prices.

Secondly, Roman Kramarchik, Head-Platts Future Energy Analytics, S&P Global Commodity Insights; acknowledges that Russia’s invasion of and ongoing war with Ukraine has clearly changed the short-term energy trajectories. “With the potential to also impact longer-term outlooks and pathways.” For him, emerging key themes include questions of energy security vs. transition. Roles of governments vs. markets.

“Fossil fuel prices have already been experiencing extraordinary price rises, which all else equal, drives for greater energy efficiency efforts and increased interest and uptake of alternative non-fossil energy sources, particularly if high prices are sustained.”

He adds that energy reliability and energy security are emerging as stronger themes; pointing toward less dependency on foreign sources for energy and critical materials. Furthermore, requirements for more localized supply chains will increase the overall cost. Also, they can slow the dissemination of new technologies required to turn over existing emitting capital stocks.

Moreover, he recommends that businesses look to explore; as well as understand, and limit exposures to key risks around energy prices, volumes, supply chains, policy/regulations, etc. Through the lens of short-term/operational actions and longer-term strategic/investment decisions, they can view them.

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The Energy Transition

Regarding whether we will be able to achieve energy transition by 2050, Mr. Kramarchik mentions that the energy sector is always transitioning and will continue to do so. As of April 2022, nearly 80 countries have made net-zero emission commitments with various target years ranging from 2035 (Finland); to as late as 2070 (India). “We currently see different likelihoods of them achieving their targets.”  Overall, they attach a low likelihood to our global 2-degree outlook through 2050; let alone a Net Zero outlook. 

James Huckstepp, Manager – EMEA Gas Analytics, S&P Global Commodity Insights; mentions that the immediate impact of Russia not supplying natural gas to Europe would be a surge in European gas pricing. This is relative to other key global benchmarks; such as JKM, diverting more LNG to Europe at the expense of demand in Asia. But limits to re-gasification (import) capacity into Europe would also necessitate further European demand destruction; “and even after assuming this, it would still be unlikely Europe could achieve the November storage fill target prescribed by the European Commission last month.”

“Russian invasion is having less effect than you might expect on fuel generation and electric power pricing, at least in the short-term, in that gas prices were already very high prior to the invasion, meaning that coal and lignite were already heavily incentivized to run at near maximum,” explained Glenn Rickson; Head of European Power Analytics, S&P Global Commodity Insights.

When asked if there were any solutions to these effects, Sabrina Kernbichler, analyst, European gas & power, S&P Global Commodity Insights; said that European countries can, and in many cases, already have limited the impact of high wholesale power prices on end-users; lowering or shelving taxes and levies on end-consumer prices.

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