Guest Opinion Delves Into The Dynamics Of Energy Prices In 2017

That was one of the themes at S&P Global Ratings' annual Paris conference this year, featuring guest speaker Robert Minsaas, global director, power and gas analytics at S&P Global Platts.

In the article published today, "S&P Global Platts Analyst Delves Into The Dynamics Of Energy Prices In 2017," Mr. Minsaas takes stock of the energy markets and responds to questions posed by S&P Global Ratings Senior Economist Tatiana Lysenko.

Platts believes that crude oil prices may be very volatile this year. Demand estimates from the International Energy Agency were on the rise last year, increasing for 2017 relative to 2016 by about 1.3 million barrels a day (mbd) to 97.6 mbd. That could amount to a significant total increase in demand of about 2.3-2.4 mbd over two years.

Thanks to the OPEC agreement on production cuts, which key non-OPEC producers promised to join, the supply story has changed considerably as well. The reductions agreed to in December by OPEC and non-OPEC members, including Saudi Arabia and Russia, the outsize producers of each bloc, are giving the oil market powerful support.

"While by December 2016 it appeared as if OPEC members had cut production slightly, it's too early to say whether the promised cuts will materialize in their entirety. It's that uncertainty that has set the stage for oil-price volatility, with markets watching closely for evidence of noncompliance, and news or data about production," said Mr. Minsaas.

Providing a ceiling to crude oil prices is oil production from shale in North America. The rally in global crude oil prices is bringing rigs back online as they become profitable again. As prices continue their upward climb, more and more rigs will be reactivated in response, nevertheless dampening global oil prices.

In the years ahead, we should see a tighter interaction between natural gas prices—and prices of other commodities—across regions.

"The LNG market is growing quickly but is relatively small compared with the global natural gas market. However, it has a large influence in marginal price formation," Mr. Minsaas said. U.S. and Australian LNG will have to compete with Russian gas at a time when European dependence on natural gas imports is high and growing.

European gas prices could be volatile, though tempered by a globally well-supplied market in the next few years where the interaction among oil, coal, gas and power prices will lead to greater convergence.

"Coal has a big impact on the global gas market because the biggest consumer is the power sector, which can switch some of its generation from gas to coal--determined by gas prices relative to coal prices," Mr. Minsaas said.
Green energy also plays a role in market dynamics for conventional fuels.

The report is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to Research_request@spglobal.com. Ratings information can also be found on the S&P Global Ratings' public website by using the Ratings search box located in the left column at
www.standardandpoors.com. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4009.