Oil producers used to cushy prices of US$110 to $120 a barrel will soon have to brace themselves for leaner times, analysts predict.
Many expect the oil price, boosted in the past two years by the Arab Spring and the West-Iran nuclear stand-off, to undergo a correction by the middle of this year.
Current prices cannot solely be explained by the dynamics of supply and demand, says the International Energy Agency, the developed countries' energy watchdog. Regional national oil companies are preparing for a dip.
Citi foresees oil prices dropping by the end of the decade to between $80 and $90 a barrel.
"Oil demand growth may be topping out much sooner than the market expects," wrote Citi in a research note this month. "The structural bull market of the previous decade was a result of surging global oil demand and consistently disappointing non-Opec supply growth, compounded by a collapse in Iraqi and Venezuelan production. The outlook for each of these factors has now reversed."
Citi's bearish outlookcan be put down to three phenomena - gas, gas and more gas.
A burst of natural gas from previously untappable shale formations in the United States has pushed down prices in North America and made it economical to replace coal and even oil with the cleaner fuel.
As environmental policies gain teeth there and in the rest of the world, natural gas will get a long-term boost. Among clean energies, it competes with nuclear, which faces public acceptance difficulties and high upfront cost issues, and renewables, which have similar installation cost hurdles.
Advances in fuel efficiency for new cars of 2.5 per cent a year will help to further cut demand for oil, says Citi.
In the industrial sector, gas-derived ethane can replace oil-based naptha in petrochemical production, says Citi. These factors, together with increases in global oil supply coming from Iraq and non-Opec producers, will help to bring together the prices of oil and natural gas, which even at Asian spot liquefied natural gas prices of $17 per million British thermal units still trades at a substantial discount to crude. But do not expect to see the beginning of the end of oil yet.
In its latest forecast, ExxonMobil warns of the transformative nature of technology and how hard it can be to see the ground shifting.
The shale gas revolution, as those in the industry love to call it, was made possible by the development of hydraulic fracturing technology, and quickly made expensive gas import terminals on the US coastline redundant.
The same technology is helping to unlock more oil from American fields. ExxonMobil expects oil to retain the lead in the world energy mix through to 2040. Natural gas will overtake coal as the second-top source, while nuclear and renewables will continue to expand.
That will be made possible by rapid growth in energy demand and, in particular, electricity demand.
Developing countries are forecast to need 150 per cent more electricity in 2040 than today; overall, the world is expected to require 85 per cent more.
Overall energy demand in developing countries will rise by 65 per cent in that time, according to ExxonMobil, while global energy demand will increase by 35 per cent. Growing trade in East Asia will boost transport fuel demand.
The increasing need for fuel is driven by growing prosperity and a forecast jump in the world's population from 7 billion to 9 billion, with the growth concentrated in Africa and India.
"Evolving demand and supply patterns will open the door for increased global trade opportunities," ExxonMobil wrote in its annual prediction.
"Around 2030, the nations of North America will likely transition from a net importer to a net exporter of oil and oil-based products. The changing energy landscape and the resulting trade opportunities it affords will continue to provide consumers with more choices, more value, more wealth and more good jobs."
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
The specs: Fenyr SuperSport
Price, base: Dh5.1 million
Engine: 3.8-litre twin-turbo flat-six
Transmission: Seven-speed automatic
Power: 800hp @ 7,100pm
Torque: 980Nm @ 4,000rpm
Fuel economy, combined: 13.5L / 100km
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
RESULTS
5pm: Watha Stallions Cup Handicap (PA) Dh 70,000 (Dirt) 2,000m
Winner: Dalil De Carrere, Bernardo Pinheiro (jockey), Mohamed Daggash (trainer)
5.30pm: Maiden (TB) Dh 70,000 (D) 2,000m
Winner: Miracle Maker, Xavier Ziani, Salem bin Ghadayer
6pm: Maiden (PA) Dh 70,000 (D) 1,600m
Winner: Pharitz Al Denari, Bernardo Pinheiro, Mahmood Hussain
6.30pm: Maiden (PA) Dh 70,000 (D) 1,600m
Winner: Oss, Jesus Rosales, Abdallah Al Hammadi
7pm: Handicap (PA) Dh 70,000 (D) 1,400m
Winner: ES Nahawand, Fernando Jara, Mohamed Daggash
7.30pm: Maiden (PA) Dh 70,000 (D) 1,000m
Winner: AF Almajhaz, Abdul Aziz Al Balushi, Khalifa Al Neyadi
8pm: Maiden (PA) Dh 70,000 (D) 1,000m
Winner: AF Lewaa, Bernardo Pinheiro, Qaiss Aboud.
