5 THEMES THAT WILL DRIVE COMMODITY MARKETS IN 2018

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Excess fluid sits on the rim of a barrel of oil based lubricant at Rock Oil Ltd.'s factory in Warrington, U.K., on Monday, March 13, 2017. Oil declined after Saudi Arabia told OPEC it raised production back above 10 million barrels a day in February, reversing about a third of the cuts it made the previous month. Photographer: Chris Ratcliffe/Bloomberg via Getty Images

By Martin Fraenkel, President, S&P Global Platts

Energy prices were rangebound for most of 2017, with oil prices staging a sustained rally in the final quarter but there have been some big structural and political shifts that are likely to reverberate.

1) OPEC member solidarity to be even more pivotal in 2018

OPEC in 2017 showed discipline with its output deal with 10 non-OPEC countries to cut a combined 1.8 million b/d. S&P Global Platts’ monthly survey of OPEC crude production puts compliance among the 12 OPEC members from January-November at 108%. But the tide might be turning. With oil prices now 40% above mid-2017 levels, several analysts believe compliance could slip in the future if some OPEC members are tempted to overproduce to capture more revenue.

Solidarity among the members in 2018 will be even more pivotal. Factors outside the bloc’s control, such as US shale production will likely determine the success of its efforts to rebalance the oil market, as some predict that the US oil production will exceed that of Saudi in 2018. Additionally, the International Energy Agency estimates that the world will need 1 million b/d less of OPEC’s oil next year to meet global demand. This could be a further meaningful deterrent to compliance.

2) Political changes in Saudi Arabia may impact energy markets

Political tides have been turning in 2017. In particular, political changes in Saudi Arabia may impact energy markets. A new younger leadership spearheaded by Crown Prince Mohammed bin Salman wants economic reforms. The impact on energy markets will take time to be felt, but the drive for efficiency and transparency may benefit markets. The first major test of confidence will come in the plan to sell a 5% stake in Saudi Aramco.

The sale, which could include an initial public offering, may value the company at $2 trillion. It is a cornerstone of the Vision 2030 strategy to diversify the economy. There has also been a shift in Saudi foreign policy with its stance on Yemen and Qatar, a major gas producer, underscoring a bid for regional hegemony in competition with Iran.

3) Diversification of crude oil trade flows

Diversification of crude oil trade flows will remain a key theme in 2018. US crude exports have soared, averaging over 900,000 barrels/day. Exports have been nearly evenly split between Canada, Europe, Latin America, and Asia. These will grow because US refineries are more geared for heavier grades. On the other hand, some analysts see the drop in the US rig count and question whether US shale oil output will continue rising. In the first six months of 2017, the US supplied more than 56 million barrels to Asian destinations, about 34% of total US crude exports. These will rise further with gains in global demand and from domestic infrastructure improvements.

The current WTI-Dubai spread is an incentive to move cargoes. Our analysis shows a surplus in coming years of light crude production in the US Gulf Coast above local demand. The ability to export freely should help by matching grades with buyers instead of pushing complex USGC refineries to process more light crude.

4) LNG industry finally coming of age

Global LNG trade flows also shifted markedly. Rising Asian demand absorbed more LNG from each of the three global LNG supply basins, with sharp rises in flows from the Pacific and Atlantic basins. Northeast Asian LNG imports have been rising faster than expected in 2017, up over 15% on the year.

US LNG exports have more-than quadrupled due to four Sabine Pass liquefaction trains ramping-up on the US Gulf Coast. The flexible nature of these cargoes has helped them meet Asian LNG demand. Australian LNG production also jumped over 30% as several liquefaction trains ramp-up on both coasts. LNG flows into Asia from the Pacific Basin have therefore jumped this year.

But from 2018 onwards some expect a rising share of these could remain in the Atlantic Basin or end up in locations such as Latin America, the Middle East or South Asia. It will be interesting to see how the market absorbs additional capacity expansion from new projects in the US, Australia and Russia. It will also be interesting to see how LNG prices evolve in 2018.

Platts JKM benchmark has reached a three year high, rising above $10/MMBTU on December 15th, driven by seasonal strength. Will prices remain supported outside the typical seasonal factors in 2018, given the upcoming rise in supply?

5) Electric vehicles spark demand for battery ingredients

There is also more than a spark of life in electric vehicles. Growing sales are seen as a major support for prices of key ingredients of lithium-ion batteries including cobalt and nickel. S&P Global Platts Analytics expects accelerating global Electric Vehicle penetration, rising from a little more than 500,000 sales in 2015 to over 7 million by 2025 – driving a surge in demand for lithium-ion batteries.

Some analysts question whether there will be enough metal supply at the right prices to produce all the batteries for the expected uptake. But among many potential constraints around electric vehicles, there is no lack of lithium carbonate and lithium in the world. Data from the US Geological Survey shows some 400 years of supply at current production levels.

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Godwin Okafor is a financial journalist, Internet Social Entrepreneur and the Founder Naija247news Media Ltd He has over 16 experiences in journalism, which cuts across traditional and digital media. He started his journalism career in Business Day, Where he was a senior editorial graphic artist, before he left to start Naija247news, An Online Financial Newspaper in 2010. He has won series of awards and he is the chairman of Emmerich Resources Limited, the publisher of Naija247news.com and also sits on the board of Students In Business Awards, (SIBA).

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