Sector risk map: Energy
The good oil times: Energy prices are up - will Exploration and Production follow?
We expect the Brent price to level off at USD54/bbl. in 2017. This would be a 20% rise compared to the 2016 yearly average. Measures meant to combat climate change put more pressure on oil demand worldwide. However, our forecast hinges more on OPEC agreements being observed by all parties. These includes Iran, Libya and, above all, Russia.
Last November, OPEC signed an unexpected deal to cut oil production by 1.2 MMb/d. One month later, it struck an agreement with several non-OPEC countries, including Russia, for a further cut of 0.6 MMb/d. Combined, these amount to cutting about 2% of global oil output, starting January 2017. On the face of it, OPEC is very much alive and kicking.
But once unleashed, market forces cannot be easily restrained. U.S. shale – oil and gas - producers lead the independence movement. Having made impressive productivity gains, these companies can quickly ramp up activity.
CAPEX investments came under intense pressure in 2015 and 2016 due to stricter balance sheet discipline and cash flow concerns. Thus a real recovery of oil and gas investments might take some time. In 2017, we expect exploration and production (E&P) spending to rise by a mere +4%, remaining 50% below its level in 2014.