Energy sector on course for growth: new regulations and political unrest

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<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Conflict in Iran"data-reactid =" 11 ">Conflict in Iran

When the market opened on January 3, oil prices rose 4% when it became known that US airstrikes killed Maj. Gen. Qassim Soleimani, a powerful Iranian military leader. Following the Pentagon's announcement that President Trump had approved the airstrike, the price of Brent oil rose to $ 70 a barrel, while the price of West Texas Intermediate rose to about $ 61 a barrel. Iran's top leader Ayatollah Ali Khamenei has promised "hard retribution".

"The game has changed and we are ready to do whatever is necessary to defend our staff and interests, as well as our partners in the region," said Secretary of Defense Mark Esper on Thursday.

The airstrikes occurred days after an Iran-backed militia attacked a U.S. embassy in Iran. Given the expected deterioration in instability in the large oil-producing region of Iran / Iraq, gas prices are likely to remain under upward pressure. In addition, analysts and politicians speculate that "hard retribution" will include further attacks on oil infrastructure, particularly in Saudi Arabia, and transports through the Persian Gulf.

Pantheon Macroeconomics chief economist Ian Shepherdson said a war between the US and Iran is "unlikely" and "Iran will turn to oil infrastructure if it wants to take revenge against the US".

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "IMO 2020"data-reactid =" 21 ">IMO 2020

A further increase in price pressure for oil, especially for lighter gasoline products, is due to the official start of the new regulations of the International Maritime Organization for sulfur emissions. As of January 1st, all ocean-going vessels must limit sulfur emissions from fuel combustion to 0.5% or less. This is achieved primarily by burning more refined fuels and using gas scrubbers to remove emissions from heavier bunker fuels.

However, the question is how many ships and ports will fully comply with the new rules, especially in the first few months, making the exact impact on the price difficult to predict. Sarah Emerson, President of Energy Security Analysis Inc., said the following:

"The big unknown is how compliant the market will be. Seventy percent? Eighty percent? Ninety percent? How many disclaimers will mailers receive? I don't think anyone will achieve 100 percent compliance. There are a lot of them are concerned with the execution of. " the plan. Will there be additional new refining capacities along the way? "

Analysts expect high volatility as the price difference between light and heavy fuels increases. Oil companies with high refining capacity and responsive supply chains will perform best against competitors in such circumstances.

Valero Energy Corp. (NYSE: VLO), for example, saw its share price rise about 13% in the fourth quarter of 2019, more than any of its major U.S. competitors that manufacture light fuels (see chart below). The key to the independent refiner's business strategy has long been the modernization and expansion of its refining operations. It does not produce its own oil, but obtains crude oil from US oil trading centers and foreign freight. This has the potential to give Valero a greater advantage if IMO 2020 pushes down the price of heavier oils far enough, although this benefit could be reversed if crude oil prices are driven by reduced global oil production.

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<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Growing demand for natural gas despite warm temperatures"data-reactid =" 40 ">Growing demand for natural gas despite warm temperatures

"The demand for oil is expected to increase by around 20% from 2016 to 2040. It remains the primary energy source for commercial traffic and continues to serve as a critical raw material for chemical products. The demand for natural gas is expected to be compared increases by almost 40% compared to the previous year. " Over the same period, primarily due to increasing industrial activity and increased use in power generation as utilities want to switch to lower-emission fuels, "the Exxon Mobil Corp. (NYSE: XOM) website said. The forward-looking data comes from the World Energy Outlook 2017 by the International Energy Agency.

Much of this expected growth is likely to be seen in maritime transport, as companies and governments are looking for newer, cheaper, and greener ways to ensure that their ships meet the 0.5% sulfur emissions limit.

Caterpillar Inc. (NYSE: CAT), a leading provider of dual-fuel technologies (engines that burn both oil and natural gas), has started developing LPG propulsion and LPG systems for next-generation ships. The development of these cleaner burning engines has the potential to become even more profitable if stricter emissions regulations are enforced in the future.

While the same forces are fueling demand for oil and natural gas, oil will offer shareholders more value in the short term, while natural gas will deliver more value in the long term.

In addition, a higher percentage of these increases will be incurred by manufacturers that have an established market in countries such as China and Russia that lack the US and Middle East heavy oil infrastructure and are therefore expected to increase their natural gas consumption at higher rates , For example, Enterprise Products Partners (NYSE: EPD) sent 55% of their exports to Asia, 18% to North America and the Caribbean, 13% to Central America and South America, 12% to Europe and Africa and 2% to other destinations in the world third quarter of 2019.

In the U.S., natural gas production rose by about 10% in 2019 after a 12% increase in 2018, according to the U.S. Department of Energy. Production growth was faster than demand growth in 2019 as the U.S. had record temperatures in late fall and early winter and required fewer gas powered heating systems.

This further increases the export capacity for US natural gas. The United States has been a net exporter of gas since 2017 and is expected to be the world's largest LNG exporter in mid-2020. Companies that can benefit from rising natural gas demand include ConocoPhillips (NYSE: COP), Exxon Mobil and Enterprise Products Partners, whose strong exports are well positioned to benefit from global energy demand.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Conclusion"data-reactid =" 52 ">Conclusion

While new international shipping regulations and escalating tensions between the United States and Iran are likely to boost oil and natural gas demand as these factors limit the production capacity of the fuels needed, oil is facing price pressures to be scarce and infrastructure use, which is why oil prices rose due to the US air strikes in Iran, while this was not the case for natural gas.

On the other hand, there is an abundance of natural gas, which adds to the price pressure caused by the comparatively lacking infrastructure to use this cleaner fuel. Efforts to increase the use of natural gas are ongoing, particularly in certain developing countries and in maritime transport, although the growth that this commodity can bring to shareholders is rather long-term and not short-term.

Disclosure: The author has no shares in the named shares.

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