The year ahead carries a multitude of trends that should be closely watched and analyst company Wood Mackenzie has listed five of the most important ones for energy and natural resources.
1. The world is adapting, but no end in sight for the energy crisis
The worst of the crisis may now have passed. Wood Mackenzie expects gas prices in Europe to be lower this year, albeit still at multiples of historical averages. Warm weather in Europe has eased the immediate pressure, and the market has begun to rebalance.
Gas demand in Europe fell 13% from July to December and developers have started to push through a wave of LNG project FIDs to boost supply. It is worth noting that no additional gas volumes of any scale will reach the market until 2025. Until then, gas prices in Europe and Asia will stay structurally high.
Power markets in Europe also remain severely stretched. Improved hydro availability and falling gas prices late in 2022 have softened prices – by the end of the year, German baseload for 2023 was almost 80% down from the summer’s extraordinary high of more than 900 EUR/MWh.
More wind and solar capacity added through 2022 and in 2023 helps. But with the French nuclear fleet continuing to underperform, Europe will rely on expensive gas and coal to keep the lights on – higher emissions are the unavoidable consequence. We expect German baseload prices to average 15% to 20% below 2022’s level but that’s still four to five times above the levels seen before Russia invaded Ukraine.
The risks? First, gas – a resurgent Chinese economy could pull LNG supply away from Europe next winter. Second, over-zealous intervention in gas and power markets creates more problems than it solves. Third, a big wildcard – war spreads into Europe, threatening disruption to non-Russian gas supplies into the region.
2. Emerging low-carbon energy moves from policy to execution
Technologies critical to achieving net zero including hydrogen and CCUS are poised for take off. Woodmac estimates that the combined global project pipeline has grown around 25% over the past year and developers are entering into offtake agreements, improving the bankability of new technologies. About 30 projects took FID in 2022 and another 170 are aiming to by the end of this year.
The Biden administration’s ambitious Inflation Reduction Act (IRA) is game-changing for the US. It has implications for other regions while the EU and UK both lifted already aggressive targets for renewables and will seek to channel investment into hydrogen and CCUS. The incentives are less clear cut but will likely center on Contracts for Difference (CfD), which were so successful earlier this century in de-risking and supporting the large-scale roll-out of renewables capacity.
The risks? CfDs won’t work as effectively this time around because of the high costs of hydrogen and CCUS. Separately, the EU’s carbon-border adjustment mechanism is due to be rolled out in October 2023, aiming to create a level playing field for domestic companies. Companies operating outside the EU could seek to sell into alternative markets, leaving the EU the loser. Europe’s high energy prices could also lead to energy-intensive industries seeking to relocate to lower-cost countries to stay competitive.
3. The metals super-cycle kicks off at the start of economic recovery
Much of Asia Pacific is so far avoiding the worst of the current slowdown, and while China has not emerged from lockdown with a bang, its recovery will be key to stabilizing the global economy.
In stark contrast to Asia, we anticipate the US economy to stall and Europe to hit recession in 2023. US interest rates will peak early in the year to suppress rampant inflation but the Federal Reserve could cut rates again by the end of the year if inflation drops sharply amid the economic slowdown. The analyst firm forecasts a low point for US GDP growth of 0% in Q3 2023.
That might be the turning point for global economic recovery. We expect global GDP growth of 2.1% in 2023, down from 2.9% in 2022. But things look much better by year-end and in 2024 we forecast US GDP to rebound to 3.0%, underpinning global GDP growth of 3.3%.
Metals markets weakened with the economy last year – prices fell by 25% to 30% with lithium as the exception. The long-term future, though, still looks promising from this lower base. Major policy initiatives underline electrification’s role at the center of the future energy mix. Demand for the metals – including copper, aluminum, nickel, lithium, and cobalt – critical for the transition – will be transformational for the mining industry.
Metals inventories ended 2022 at modest levels and there is little to hold back price recovery when the global economy picks up towards the end of the year. This time it may not be a false dawn – 2023 could finally kick off a new metal super-cycle lasting through this decade.
The risks? Stubbornly high inflation forces central banks to keep rates higher for longer, suppressing recovery and risking stagflation. Delayed economic recovery keeps a lid on metals demand and prices.
4. Global investment edges up, oil and gas closing the gap with power
Investment in energy and natural resources is on an upward trend. However, sector-specific challenges do exist. According to Wood Mackenzie, overall spending on supply across oil and gas, power, renewables, metals, and mining will increase by 5% to $1.1 trillion in 2023.
Oil and gas companies and miners will adhere to the capital discipline that has helped restore stock market ratings while surplus cash generated will again be funneled into buybacks. The strength of Big Oil’s balance sheets suggests that targeted M&A will return.
Capital spending in upstream oil and gas continues to recover. An increase of 10% in 2023 to around $470 billion is expected, well above the cyclical low of $370 billion in 2020. However, around half of the increase this year is inflation related.
The specter of windfall taxes adds uncertainty to the cautious mindset of oil and gas companies. Out of a healthy pipeline of 60 large potential project FIDs, Woodmac believes only 30 will proceed in 2023.
Spending on global power and renewables will be flat at around $500 billion, matching 2022’s record. The sector continues to eclipse upstream oil and gas as the biggest segment in the global energy market. After a decade of strong growth, spending on renewables will temporarily falter in 2023, checked by cost inflation in a tight supply chain. Renewables spending now makes up 70% of the total, having doubled over the last decade. We expect the strong upward trend to resume in a year or two with the implementation of REPowerEU and the IRA.
A wave of FIDs in nascent low-carbon technologies, including hydrogen and CCUS, won’t deliver much investment this year as more money is expected to flow through in 2024. Recent M&A by Big Oil will trigger more investment in 2023 in biofuels, biogas, and biomethane.
The risks? Prolonged underinvestment triggering sustained high prices is a big fear, whether in energy or metals. Ambitious policy goals for renewables risk slippage due to cost inflation.
5. Recovering demand drives oil prices higher
Prices may be volatile in the early months of the new year with low economic growth or recession in some parts of the world. The last 12 months, though, have proved that oil will be central to the energy mix for years yet. China’s recovering economy is key to the demand side, helping push global oil demand up 2.3 million bpd this year versus 2022 – 8% higher and the fourth-biggest annual rise this century.
The pace of demand growth through the year is a better indicator of how the market could be jolted out of the current doldrums. Woodmac forecasts an increase of 3.0 million bpd for Q4 2023 compared with Q4 2022, lifting demand to an all-time high of 102.6 million bpd.
Non-OPEC supply growth (US, Canada, Brazil, Guyana) in 2023 broadly matches that growth. But the OPEC+ decision to cut production in November 2022 signaled not only its determination to balance the market but to hold prices around $90 per barrel. Those goals will be more easily achieved by recovering demand growth.
The risks? Mainly Russia. The EU product ban from February 5 will add friction and costs to the global refining system at a time of tight diesel supplies globally. A big risk is that Russian product exports stall, tightening both product and crude markets; while the flow back of products back into the Russian system causes domestic crude production to fall more than our forecast.
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