2011: The year of the dragon
OIL PRICES above $100 a barrel are unsustainable. But a market once again gripped with speculative fever will test this psychological barrier in 2011. A battle between bulls and bears will be one of the themes of the year
The usual suspects will play their part. Goldman Sachs has got in early, already predicting a three-digit crude price next year. Other investment banks, holding big positions in the oil market, will be similarly bullish. As Western economies edge towards health, this will support equity markets and, therefore, commodity-market sentiment, too.
So, in the coming months, will the dollar's persistent weakness: low interest rates and the second slug of quantitative easing are two downward forces on the currency that will be around for a while. But a recovery in the euro, as the EU acts to protect the eurozone, will reinforce the dollar's decline.
Bears will be rewarded later in 2011, when it becomes apparent that high oil prices are, again, destroying demand. Even China may show some signs of oil-price fatigue. Stagnant demand in Western economies will become more obvious, as high fuel prices become another de facto tax on consumption. It won't be an easy year for many in the West, where governmental budget slashing will push up unemployment.
If the Federal Reserve's money printing yields the kind of surge in US economic activity it expects, inflation worries will eventually lead to calls for higher interest rates in 2011. A rise in the dollar's value in the second half of the year, backed by more economic confidence in the US, won't send people back to the SUV showrooms, or encourage any other kind of pre-bust oil-consuming behaviour. But it will soften oil prices.
Oil producers will feel flush again and the transfer of wealth from buyer to exporter – from high-spending to high-saving economies (see p24) – will continue to affect liquidity, especially in the West. But the oil-rich countries of the Middle East, Russia, Canada and other big crude exporters will feel wealthier.
Chinese shopping spree
China's financial might will see its cash-rich national oil companies (NOCs) continue to shop for assets around the world in 2011. As the country increases refining capacity – the natural extension of its strategy to become the world's manufacturer of everything – its NOCs will increasingly seek assets that will yield long-term oil feedstock to repatriate. Canada's oil sands, Brazil's deep-water plays and African oil will be the prime targets. Other Asian NOCs will join this rush. South Korean KNOC's recent hostile take-over of Dana Petroleum suggests smaller-cap companies will also be on the shopping list.
Rivalry between China and the US will become obvious in Canada. Putting strategic interests above environmental worries, the US will approve a pipeline from Alberta to Texas, underpinning growth in the oil sands. But despite the protests on Canada's west coast, Enbridge will win approval for another oil pipeline, to a port in British Columbia, opening Asia's market for Alberta's bitumen. The tussle between US and Chinese buyers will lift prices for Canada's crude, and give it world status.
Indeed, 2011 will be a year when unconventional oil grows increasingly conventional. Strong prices and Canada's success in exploiting its bitumen will encourage more investment elsewhere. The US' Bakken shale, Venezuela's Orinoco Belt, Madagascar's heavy-oil and other unconventional deposits will draw in investors.
The unconventional era will, however, be dominated by natural gas and in 2011 the shale-gas revolution will spread beyond North America (see p3). Poland will unveil pilot development projects, spurring another land rush for unconventional-gas assets in eastern Europe. But China's prospects will draw most interest (see p31). In 2011, new investors will arrive in the country's upstream, specifically to exploit shale-gas and coal-bed methane prospects.
This will be more bad news for LNG exporters, for which 2011 will be another year of uncertainty. New export capacity – early in the year from Qatar, as it reaches its output target, and from Australia's Pluto – will add to the global glut of gas supply, leading spot prices lower. In Asia, China's hardball negotiating will put more pressure on exporters to abandon oil-price indexation. Other buyers will cheer from the sidelines.
In the US, meanwhile, a year of Congressional gerrymandering and scrapping will end any prospect of climate-change legislation. But new incentives for gas-fired power generation and even gas-fired transportation will make their way through Congress. This will be a boon for the gas industry during an otherwise bleak year, because Henry Hub prices will remain low in 2011. Rig counts, inflated by use-it-or-lose-it rules and the money flooding into the sector from foreign investors, will remain high. Energy will be critical to the campaigning for the White House, which will begin in earnest towards the end of 2011.
But not all oil producers will look healthy. In Russia, worries about declining production will see the country take bold steps to reverse the trend. A new era of production-sharing agreements, with some caveats, may even be launched in 2011, although Western majors won't necessarily be the companies signing them.
Indeed, the majors will grow increasingly gassy and NOCs increasingly oily. Their countries' economies will do the same. And milestones will be reached. Shell will bring on stream the world's largest gas-to-liquids (GTL) facility, Pearl GTL, an emblem of gas abundance – and a symbol of gas's potential in the global transportation market.
Meanwhile, electric cars will begin genuinely to penetrate the mass market in 2011. Nissan's Leaf and Chevrolet's Volt will lead a host of such vehicles competing for buyers – and early adopters will buy them at surprising speed. High fuel prices will encourage this more than greenery. China's emergence as a manufacturer of these new cars and as its fastest-growing market for them, trends that will be evident by the end of 2011, will bring a new era to motoring (see p39).
This will be good news for the world's climate. By encouraging greater efficiencies and by stimulating the transition to electric motors in transportation, high oil prices in 2011 will also help to control longer-term emissions of greenhouse gasses.
But the failure of the Cancun summit at the end of 2010, which will have yielded little in the way of broad agreements to combat climate change, will cause despondency. By the end of 2011, the world will be 12 months closer to the expiry of the Kyoto Protocol, but no closer to a serious agreement on what should replace it. It will grow apparent that the world has waited too long: adaptation, not mitigation, will be on the lips of government planners.
China's emergence as a producer of green technology will give some comfort. But in this, as in everything else, it will also reveal its ascendancy over the West, where inaction on green tech has handed a competitive advantage to the East. High oil prices will reinforce this imbalance. Asian economies will continue to thrive, and in the next 12 months their new power will be clear. But it will be another year of struggle in the West. China will celebrate the start of the Year of the Rabbit in February. But 2011 will really belong to the dragon.