While the shale gas boom continues to play an important part in the economic well-being of the United States, it was the price of oil that was foremost in the minds of presenters and attendees alike at VMA’s 2016 Market Outlook event held in Chicago this month.
While new coal is basically dead in the U.S., Tim Riordan of American Electric Power pointed out that maintaining the existing plants is essential as the centralized fossil fleet shrinks to meet tightening environmental regulations. In addition to maintaining the older fleet, there is also increased renewable penetration and, as older units are forced to retire, greater and greater emphasis is going to be placed on the need for equipment and components to support and sustain the new duty cycles that include frequent startups and shutdowns.
To valve manufacturers he said, “Ask yourself, where are your R&D technology dollars going? We in the power generation industry need heightened corrosion/erosion resistance and greater efficiencies. Valves need to be able to handle the added stresses. We need valve manufacturers to come up to the challenge. Environmental rules are pushing the need for more efficient, higher temperature, higher pressure valves. Industry, OEMs and material suppliers need to communicate needs and objectives to ensure existing and new technologies can meet expectations of operators.”
Natural Gas and Oil
While the price differential between oil and natural gas has shrunk markedly, according to Ken Medlock of the RICE Center for Energy Studies, there is still opportunity for growth in the U.S. to export LNG. “Shale is not dead, that’s for sure,” he said. “Though the price has gone down, so have costs. As the number of rigs has decreased, suppliers have been more willing to reduce prices so that operators can still operate in the black.”
There have been other changes in the natural gas market in the last 12 months. “Last year, the price in Asia was $15, now it is in the $7 to $8 range. In the U.S., prices are in the mid $2 market,” he said. “So, while the differential has shrunk quite a bit, there is still enough difference to support trade.”
While the swings in demand for natural gas make this an uncertain prospect, the fact that Australia and Qatar are also exporting natural gas means the U.S. is completing with them for sales in Asia. However, as was mentioned in Riordan’s presentation, the demand for natural gas for power generation in the U.S. is increasing, which will support production and price domestically.
Medlock concluded that productivity improvements have moderated the impact of higher costs, which have been reduced by 25 to 35%. “This helps preserve margins, which helps keep the shale going, and we will continue to see growth over the next four to five years,” he said.
John Spears of Spears and Associates was the bearer of bad news on the upstream oil front. “As we were meeting last year, the prices were dropping, but nobody expected them to drop as much as they have. U.S. oil supplies grew faster than world oil demand in 2013 and 2014 and in the third quarter of 2014, oil demand slowed while supply grew. The Saudis were not willing to cut production and lose share. They decided they were going to let supply and demand balance the market and let the chips fall where they may. Prices plummeted.”
The question is, when will demand begin to grow and prices rise again? “World oil demand growth has accelerated a bit in response to lower oil prices,” Spears pointed out. “At the same time, U.S. oil production growth is slowing. However, OPEC has increased output in the past four months. That means that global oil production will grow in the next year, meaning that prices will remain low.”
However, Spears suggested that U.S. oil production will continue to slide for the rest of 2015. Also, despite the EIA’s forecast that there will be slight U.S. oil production growth in 2016, Spears anticipates it will be negative next year. “If so,” he said, “that will help tighten the market as time goes by. The question is, how fast and to what extent will Iran’s re-entry affect the market?”
The biggest concern for Spears with respect to demand is the slump in China’s economy and this was reflected in other presentations at the workshop.
U.S. and World Economies
IHS world economist Simona Mocuta admitted that this year, for the first time in her experience, she was not positive about China. “It’s not usual for me to say I have bad news; normally I say that China is doing well. But there’s nothing I have to give you in terms of a positive story there this time,” she reported. “China has a problem with over-investment. You can’t continue forever!” According to Mocuta, India is the new growth leader among BRIC—the group of emerging countries of Brazil, Russia, India and China, which all are deemed to be at a similar stage of newly advanced economic development.
Mocuta also addressed the U.S. dollar’s value. “To a large extent, the dollar is close to its peak and will start weakening over the medium term. One risk is that China is a major trading partner. They have done nothing to their currency over the last year, and the fundamentals in that country are worsening. People around the world are getting close to “too much of a good thing,” and there are many places in Asia where consumer prices are deflating. That causes problems because the Asian consumer was supposed to be a big driver to world economy,” said Mocuta. This will have an impact on the U.S. economy and the dollar.
For his part, Jeff Werling of the University of Maryland said, “For now, the good news outweighs the bad. While housing is still a question, domestic demand momentum is strong.”
According to Werling, many factors point in a positive direction for the domestic U.S. economy: Expanding employment will have positive spillovers for wages and housing, government spending is stabilizing and fiscal pressure is relieved for many states and localities who are recouping some of their income after the great recession.
Like Mocuta, Werling sees foreign financial problems and security issues as posing the biggest threat to domestic economic growth and stability. But there are other issues as well. “As it turns out we are in a unique time in macroeconomics because monetary policy, meaning the interest rate cuts, didn’t stimulate the economy. Why? Because companies were over-leveraged, as were banks and homeowners. So the interest rate didn’t matter. If you can’t borrow, zero interest rate doesn’t help,” he pointed out. “The lack of inflation is also a problem. The biggest problem with disinflation and deflation is it makes those debt loads for governments and individuals more difficult. If you can factor in 2% inflation in your borrowing habits, you know that the debt load is going to fall by 2%. But if you’re low in inflation, you don’t have the ‘growth’ that covers the debt load.”
Fair News in Water and Wastewater
Tom Decker of Brown and Caldwell pointed out that water and wastewater construction was flat at this time last year, this year—at least through May—there is 10% overall growth. Most of that construction is in wastewater treatment. “In the U.S., the total water business is about $100 billion per year. Of that, wastewater comprises about 65%, and drinking water is 35%,” he said. “Globally, this is a $500 billion plus business, but in the rest of the world, wastewater is only about 40 to 45% of the global market; fresh water is 55 to 60%.”
One of the driver’s affecting growth is simple population growth. According to Decker, 60% of the world’s current 7 billion people lives in the cities. By 2050 the world population is expected to be 9.5 billion and more than 70% will live in cities. “This is putting stress, strain and capacity problems on water delivery and wastewater systems,” Decker pointed out. “The need to expand those services is driving the business forward. However, even though the signs are all very positive, we’re having difficulty forecasting the timing of projects. We know there is work, but delays keep pushing things out.”
This creates problems when trying to figure out when and to whom to assign projects, and how to staff them. “They’re all going to happen, they are just much later than even some of the most pessimistic forecasts,” Decker summarized. “There will probably also be some water regulations coming up next year on disinfection, and lead and copper levels, so that will create opportunity for the industry.”
This market outlook also featured presentations on Wall Street’s take on the flow control industry, reports on petrochemicals, non-residential construction, the oil sands and an in-depth look at the manufacturing talent gap. Watch VALVEMagazine.com and the fall issue of VALVE Magazine (coming out in late October) for more reports on this important workshop.