Investing in a Shifting Market

November’s OPEC summit is drawing attention to Asia’s ever changing oil and gas industry

Oil prices witnessed a rapid decline amidst the Organisation of Petroleum Exporting Countries (OPEC) gathering on Wednesday 30 November in Vienna. For the first time in eight years, OPEC has struck a deal to cut oil output; which it is hoped will in turn boost prices.

The uncertainty surrounding the OPEC summit and in particular whether an agreement to cut production and prop up the markets has caused oil prices to undergo a rapid fall. 

Many had doubts as to whether the major global exporters at the gathering would be able to reach an agreement to rein in output of the industry; details of the proposed cut were initially discussed at a summit in late September, where the global exporters then decided to set the date in November to finalise details of the agreement.

At the summit, OPEC took note of oil market developments since it last met in Algeria and reviewed the outlook for the oil market for the remainder of 2016 and 2017. Its observations concluded that global economic growth forecasts are reasonable for 2016 and 2017, at 2.9 percent and 3.1 percent respectively.

Agreements to cut production by 1.2 million barrels a day is proving to be a positive outcome for Asia’s exporting countries, such as Malaysia, Indonesia, Brunei and Myanmar. However, a negative impact is predicted in regards to the oil importing countries, including Japan, China, South Korea, Thailand, the Philippines and India.

Countries which remain dependant on oil imports - for example India and Sri Lanka - are the most vulnerable to higher oil prices due to the high share in oil and its total import bill.

Over the past two years Asia has benefitted from falling oil prices, and with the coming year promising to be exciting for oil & gas industry developers, not everyone has seen the current situation as a negative.

For investors this period in time is a prime opportunity to pick up prime assets at a far cheaper rate. Additionally, OPEC forging this new deal will create a structure which may in fact benefit its direct competitors in terms of the Asian markets.

Other current factors have also contributed to the ever changing market outlook for the Asian oil & gas sector, for example ‘the big chill’. Commodity market analysts are blaming the La Nina weather pattern for the current chill, with temperatures in Seoul and Beijing forecast to drop well below the levels which are typically seen at this time of year; while many parts of Japan have also been hit by colder conditions than usual.

As a result the demand on power is growing as people have to crank up the heating in both their homes and offices; pushing producers and utilities to draw down coal, gas and oil stockpiles and therefore increase imports.

The big chill is subsequently prompting oil refiners to make greater volumes of products such as kerosene, which is widely used in heaters in Japan, contributing to a 54 percent jump in Asia’s oil refining margins.

“La Nina has taken over El Nino, which means colder than expected winters are ahead, not just this year, but likely in the next two years,” said Gordon Kwan, head of Asia oil & gas research at brokerage Nomura Holdings Inc. “We see high chances that fossil fuel prices like coal, oil and gas could spike further due to robust demand, and other factors.”

Plans for the future

There is the potential that the new deal may backfire in Asia, with big buyers upping supplies from elsewhere as they don’t want to pay for the higher fuel costs. During the two months in between the summits, tanker shipments to Asia from non-OPEC sources such as Alaska, Azerbaijan and the North Sea have grown.

Asia alone uses a third of the world’s oil supply, therefore buyers have watched on with concern as their biggest suppliers, OPEC, openly discuss propping up prices in attempts to restore balance to the sector. Non-OPEC suppliers are readily available to the Asian market, which provides a new option to buyers if the price is no longer right.

The Major importers in Japan, China and South Korea have established long standing relationships with the OPEC suppliers, with many in the Middle East providing two-thirds of Asia’s oil needs. Japan’s refiners in particular are very keen to diversify sources to cut reliance on any one single supplier that they use.

With China now challenging the United States as the world’s largest oil importer, efforts to reduce the dependence on Middle East suppliers has already witnessed OPEC Saudi Arabia lose its top spot as a supplier to rival Russia.

Refiners in Asia remain very aware of the possibility of the huge shift in market dynamics and how in response to this summit, other suppliers could become more attractive; even OPEC is seeing a price rise in the hopes of boosting economies of countries which rely heavily on crude exports.

Although Asian markets are demonstrating a real openness to new suppliers, price is still the ultimate authority when it comes to decision making.

Petro-acquisitions

Asian oil & gas companies are set to invest vast sums of money in the global oil & gas sector; two particular Asian firms are planning a spree on petro-acquisitions moving into 2017.

Indonesia’s state oil firm, Pertamina’s core business is based in oil, gas, renewable and new energy based on firm commercial principals that benefit both inside and outside the country; the commitment to providing more efficient energy sources is a prime focus.

Announcements from both Petamina and the Japanese Government arm, Jogmec, show that the spending spree may now be extending to global oil & gas assets. Pertamina has $700 million to spend this year on its acquisitions, which will drastically increase in 2017 where the figure is likely to be in the billions. Jogmec is even flusher with cash, having a financial backer which totals $5.2 billion each year for oil & gas.

The question is where would the firms be looking to invest this money; with both firms headquartered in Asia, which suggests the region would be a logical place to look for buyouts. However, recent events show the focus is likely to extend well beyond just Asian projects in the future.