Backwardation into 2018

The coming year should be mixed for the global oil and gas industry, according to S&P Global Platts “2018 Energy Outlook.” Inventories declined during 2017, says the analysis, almost eliminating the global surplus. 2018 should see U.S. shale production lead global supply to grow faster than demand, but stocks will continue to decline.

That could lead, says Platts, to “relatively strong nominal prices” and “backwardation,” or a market condition where the price of a commodities’ forward or futures contract is trading below the expected spot price at contract maturity. U.S. crude exports will increase. Given refinery constraints in the U.S. continuing into 2018, “refinery margins will stay strong….”

New production of natural gas, particularly in the Permian Basin in Texas and New Mexico, will put downward pressure on U.S. prices. New supplies of liquefied natural gas, says Platts, “will test the market’s ability to consume or store [LNG] during the second and third quarter of the year without a major reduction in price. In Japan, a massive increase in LNG bought under contract “will create a choice for its buyers: either force burn LNG at the expense of coal, oil, and additional nuclear re-start delays, or push large unsold volumes back into the spot market.

2017 saw global coal demand bouncing back, surging in several markets. “From unwinding of coal-to-gas switching in the U.S., to sizeable overall energy demand growth in China, to underperforming nuclear generation, coal was generally the fuel of choice to meet incremental fossil fuel demand in the power sector outside of Europe in 2017,” says Platts.

President Trump’s proclaimed policy of rescuing a moribund U.S. coal industry, says Platts, is “not moving the needle, despite promises to the contrary.” China’s coal burn will “decelerate in 2018, on the back of surging renewables and moves to clean up air pollution.” That will have “an outsized bearish impact on the global coal market. Recovering nuclear output in Europe and Asia will also serve to constrain coal-fired generation.”

Chris Midgley of S&P Platts

Electric vehicles will not transform transportation in 2018, according to the Platts analysis. “Fears in the media about demand destruction EVs in the short term are misplaced,” says Chris Midgley, global head of analytics. He observes that “despite impressive growth figures and annual sales likely to head above one million EVs a year, this has to be put into perspective with the 80 million new cars sold every year.”

Coming soon: EIA’s annual energy outlook, later this month.

— Kennedy Maize