APICORP chief economist’s top three signposts for energy investments in 2019

Leila Benali photoLeila Benali, the chief economist of energy economics and sustainability at APICORP, shared her thoughts on the energy sector outlook in 2019 in the latest report

Benali said, “2018 ended with more red flags than ringing bells for global energy markets, as analysts looked for historical comparisons to make sense of declining stock prices, fluctuating commodity and currency markets.”

She believed that continued volatility, perceptions and computerised speculation will continue to play a significant role in global energy markets.

“Unlike previous periods of volatility, computerised trading, quantitative hedge funds, and passive funds now drive much of the trades. Consequently, trades rely on momentum as inputs, while downward movements in bearish markets are exacerbated.

“Geopolitical issues aside, as far as oil prices are concerned, there will be few new factors to consider. For instance, the International Maritime Organisation (IMO) announced that it will fully implement the Sulphur caps in January 2020, as shipping companies order more scrubbers and refiners in preparation for ‘IMO 2020’,” she added.

She anticipated that OPEC+ cuts would help balance the market in the short term, but that Brent would trade between US$60-70 per bbl by the second half of 2019, with the exception of a sharp economic shutdown.

“That being said, if additional supply growth materialises in a context of weaker demand, we might be back to ‘lower for longer’,” she noted.

Energy investments with a reduced pool of investors will see the role of MDBs develop. Traditional energy players include a new cycle of convergence and integration between upstream, downstream and utilities.

“In addressing climate concerns, players are investing to reduce the carbon intensity of their operations with diversification into mobility, logistics, petrochemicals, utilities and storage, driving the strategies of several majors and NOCs. The US energy industry, particularly unconventional developments, continues to have relatively easy access to capital, through publicly issued securities, foreign backers and domestic private equity,” she highlighted.

She also pointed out that the picture in the rest of the world is mixed.

“Another major break with the past is that we are in the midst of a major questioning of globalisation and multilateralism, coupled with rising populism and isolationism, that have challenged binding global climate agreements. The multilateral institutions that were created to foster this cooperation are also coming under pressure,” she explained.

APICORP estimated that energy projects worth US$337bn were underway in the MENA region in 2017, with US$622bn planned for the next five years.

“Around 80 per cent of energy investments in the MENA region are still government-led, but budgets are squeezed as these governments have no choice but to run expansionist budgets, due to populism elsewhere.

“With private and government capital holding back or focused on selected strategies, Multilateral Development Banks (MDBs) can close funding gaps by prioritising sectors which are instrumental to their development and are of substantial economic importance,” she concluded.

The structural transformations in the sector bring fascinating mixtures of opportunities and inevitably change the way energy is financed. Consequently, APICORP’s research this year is expected to focus on areas where investment support and private sector development are particularly needed, in order to facilitate energy transitions and support sustainability agendas for gas, system flexibility and technology services.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
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