Energy investment to take big hit from pandemic, IEA forecasts

Energy investment to take big hit from pandemic, IEA forecasts
Revenue from energy is forecast to fall by $1 trillion this year. (File/Shutterstock)
Short Url
Updated 27 May 2020

Energy investment to take big hit from pandemic, IEA forecasts

Energy investment to take big hit from pandemic, IEA forecasts
  • The fall in new spending on all energy sources is caused by the biggest ever fall in demand for energy
  • Global investment in oil and gas - forecast to fall by more than 30 percent - is the biggest element of the drop in energy investment

DUBAI: Global investment in energy is set to drop by 20 percent, or by nearly $400 billion, this year as demand plummets in the wake of the coronavirus pandemic, the International Energy Agency (IEA) forecast.

What the IEA called “an historic plunge” in new spending on all energy sources - from fossil fuels like oil and gas through to renewables like solar and wind - is caused by the biggest ever fall in demand for energy as economies try to edge out of the global economic lockdown brought about by the pandemic.

Revenue from energy is forecast to fall by $1 trillion this year, with earnings from sales of crude oil - essential for Saudi Arabian and other producers - accounting for most of that decline, the IEA said. For the first time in history, consumers will spend more annually on electricity than on oil.

Fatih Birol, the IAE’s executive director, said the forecasts were “deeply troubling” after the turmoil in energy markets since early March.

“It means lost jobs and economic opportunities today, as well as lost energy supply that we might well need tomorrow once the economy recovers. The slowdown in spending on key clean energy technologies also risks undermining the much-needed transition to more resilient and sustainable energy systems,” he added.

Global investment in oil and gas - forecast to fall by more than 30 percent - is the biggest element of the drop in energy investment, and will be felt by all producers.

“The shale industry was already under pressure, and investor confidence and access to capital has now dried up: investment in shale is anticipated to fall by 50 percent in 2020. At the same time, many national oil companies are now desperately short of funding,” IEA said.

The world’s largest oil company, Saudi Aramco, has said it would maintain investment plans at between $25bn and $30bn this year, but that spending plans for 2021 are under review.

Most of the big independent oil companies have already announced plans to cut back near term investment.

“For oil markets, if investment stays at 2020 levels then this would reduce the previously-expected level of supply in 2025 by almost 9 million barrels a day, creating a clear risk of tighter markets if demand starts to move back towards its pre-crisis trajectory,” the agency added.

Investment in renewables like solar panels has been more resilient than traditional energy sources during the crisis, but is expected to lose the gains it has made in the past three years as investment decisions are scaled back.

Overall investment in cleaner energy sources will comprise 40 percent of the global total this year as the proportion spent on oil, gas and coal falls significantly. “In absolute terms, it remains far below the levels that would be required to accelerate energy transitions,” the IEA said.

The so-called “silver lining” of the pandemic crisis - less-polluted environment as motor and industrial emissions decline dramatically - is downplayed by the IEA.

““The crisis has brought lower emissions but for all the wrong reasons. If we are to achieve a lasting reduction in global emissions, then we will need to see a rapid increase in clean energy investment. The response of policy makers – and the extent to which energy and sustainability concerns are integrated into their recovery strategies – will be critical,” Birol said.

Nor is there any sign of a greater uptake of more energy-efficient electric vehicles because of the crisis. “Estimated investment in efficiency and end-use applications is set to fall by an estimated 10 to 15 percent as vehicle sales and construction activity weaken and spending on more efficient appliances and equipment is dialed back,” the IEA said.


Saudi Arabia’s surprise cut transforms oil market outlook

Saudi Arabia’s surprise cut transforms oil market outlook
Updated 23 min 8 sec ago

Saudi Arabia’s surprise cut transforms oil market outlook

Saudi Arabia’s surprise cut transforms oil market outlook
  • From a situation at the end of last year when there was talk of Brent crude “stuck” at $50-$55 per barrel, many experts are now looking for upward of $60 in 2021
  • The “big three” of the American financial scene — Bank of America (BoA), Goldman Sachs and JP Morgan (JPM) — have all recently come out with positive outlooks for oil

DUBAI: Suddenly, the outlook for oil prices has changed dramatically.
From a situation at the end of last year when there was talk of Brent crude “stuck” at $50-$55 per barrel, many experts are now looking for upward of $60 in 2021, with some of the more bullish targeting $65 by this summer.
The “big three” of the American financial scene — Bank of America (BoA), Goldman Sachs and JP Morgan (JPM) — have all recently come out with positive outlooks for oil for the rest of the year.
BoA said a number of macroeconomic factors “could all combine to push oil above the $60 mid-2021 target we introduced back in June last year,” and acknowledged that the oil price could “easily overshoot” its projections.
JPM said a “supercycle” in oil prices — a scenario where surging demand and tightly controlled supply led to prices significantly, albeit temporarily, above current levels — could be on the horizon.
In perhaps the most bullish recent prognosis, analysts at Goldman Sachs — already among the most optimistic in the business — brought forward the date by which they expect Brent to hit $65. They now think it will be at that level six months earlier, in July this year.
“The events of the first weeks of the year have sharply reduced the risks that the market rebalancing gets derailed,” Goldman said.
So what has happened to change sentiment so significantly? While there is a range of positive economic news — from the global rollout of vaccines to a general surge in commodity prices signaling a pick-up in industrial activity — this has been tempered to some degree by the increased number of COVID-19 cases in many parts of the world.
But what appears to have made the difference for the energy analysts was the surprise decision by Saudi Arabia earlier this month to cut an extra 1 million barrels per day from its output. This unilateral reduction — greeted by the Kingdom’s OPEC+ partner Russia as a “new year present” — headed off simmering tensions within OPEC+ and accelerated the drain of global oil inventories still high after the oil market chaos of 2020.
“The unilateral and unexpected production cut from Saudi will offset in our view the near-term negative hit to demand from a quickly spreading virus,” Goldman said.
The cut by Saudi Arabia — which its Energy Minister Prince Abdul Aziz bin Salman said was a reflection of its role as “guardian of the oil industry” — will keep March production at low levels just as global oil demand rebounds sharply as vaccine rollouts encourage more global economic activity.
The other positive factors for Brent, according to Goldman, are the US presidential transition, which is likely to lead to a $2 trillion stimulus package by Joe Biden, and the continuing tight financial discipline within the American shale industry, which is unlikely to significantly raise production until oil hits $65 per barrel.
BoA pointed to the general increase in commodity prices — not just crude oil — as a sign that global economic growth was resuming, especially in Asia.
Regardless of the generally more benign global economic outlook, JPM highlighted the critical role the Saudi oil cut had played in the new bullishness for Brent, and for the longer-term outlook.
“The short-term supply cut demonstrates that Saudi is willing to cut deeper if demand is at risk, and ensures a sustained OECD (Organisation for Economic Co-operation and Development) inventory drawdown, also capable of absorbing increased supply from Libya and Iran.”
It is too early to call the end of the pandemic economic shock, but at least in global energy markets it looks as though rebalancing of supply and demand is well on track.
The oil price is reflecting that optimism too. Brent is now trading at above $56 per barrel — a post-pandemic high.