Energy Predictions for 2010
(Published in Cotizalia on Dec 24 2009)
First, I do not agree at all with those who see the dollar appreciated in 2010. We are living in the greatest appropriation of wealth in recent history, and if the dollar has fallen so much so far, wait to see the effect of the 1.3 trillion dollars that the U.S. has to refinance and the $700 billion in pending stimulus plans. The weak dollar is part of the reason why I am more positive than other investors in oil and gas prices.
Second, everyone expects interest rate hikes. I do not think so. With the UK and US together needing to refinance $2 trillion, debt to GDP of 300% and 10% unemployment, interest rate hikes are more a dream than a reality.
In the world of oil, we face a year of anemic demand and abundant supply. The supply problems and decline rates that are so appealing for the market are not an issue for 2010. Demand is likely to be above 85.4 million barrels a day, but this means that we will have a capacity surplus of around 4 million barrels a day. Therefore, the production cuts from OPEC and its adherence to the quotas in place (at very low levels today, 58%) will be decisive.
But what we are likely to see are aggressive moves in Asian demand due to lower nuclear production and the already mentioned infrastructure projects. Thus, it is not surprising that we might see a period of high volatility. Certainly in 2010 oil will likely continue to be a hedge against the dollar. I also expect demand from emerging countries to grow by around 6%, so it would be reasonable to see oil reach $85/barrel as inventories are reduced to normal levels, which I do not expect to happen until 2011.
On the supply side, with a 5-6% decline from existing fields, non-OPEC production is likely to fall to around 50.8 mbpd instead of the estimated 51.3. And forget refining. With nearly 7 mbpd of excess capacity and anemic demand, refining margins will not be a riot.
The gas market in 2010 will likely see a drastic drop before the recovery, which will be even more drastic. Demand continues to be the problem because it depends on electricity consumption and we will see coal to gas switches, but no real demand increases in a year in which producers will increase LNG supply capacity by 10%.
But beware, because the market is exaggerating the gas overcapacity in at least 20BCM. I am convinced that we will see lower exports to Russia (145BCM instead of 162 expected), Norway and Qatar reducing exports, leaving the market “only” with 10BCM of overcapacity, more than enough to justify spot price of $ 5.5 -6/MMBTU and 35p per therm … but before the recovery we will see gas prices to record lows, until the recovery in demand in winter.
The electricity market in Europe will probably live a delayed pickup in demand, where we still need an industrial demand still heavily damaged by the crisis. A drop in electricity demand of 0.5% in Europe could be feasible. Reserve margins (excess capacity) in Europe are at levels of 25% considering the additional 15GW of wind capacity, and we probably will not see an environment of demand-supply balance until 2012. In such an environment is difficult to see higher electricity prices. And in oil, gas and electricity, high volatility leads to reductions in investment, which explains in part my positive view of future prices.
2010 will, in my opinion, be a year of divestments and capital increases, and energy companies can take advantage of the market opening to preserve the strength of their balance sheets in the bottom of the cycle. I estimate around $35 billion in the oil and electricity sectors. Pay attention to balance sheets, it seems that everyone has forgotten debt in 2009. It will also be an exercise in which well-capitalized companies will continue to aggressively buy assets, particularly in exploration and production and “shale gas. The war for natural resources is not going to stop, and I reckon a figure of about $30 billion in mergers and acquisitions.
I believe that 2010 will not be a bad year for investments by taking advantage of occasional corrections. Everyone is negative or cautious, money remains cheap, the cost of capital of companies continues to fall, bonds are overpriced … This generates expansion of multiples even with stagnant profits. Remember Buffett, the market is never wrong. Use it as a tool, not as a guide.