Market Outlook

Inflation and significant reductions in the availability of Russian commodities, especially natural gas, in Europe following the removal of almost all Russian supply to the region, were the key causes of a substantial increase in global energy prices in 2022, leading to the “first global energy crisis” as described by the IEA. This has amplified the incentive for Europe to further diversify and decarbonize its energy supply. High prices, in particular for gas and electricity, have put the focus back on security of supply.

2022 was something of a watershed year in energy markets. Consumers and central banks across the globe were faced with the challenge of rapidly rising inflation already at the end of 2021 and the early part of 2022, and this was before the picture was further complicated by the Russian invasion of Ukraine at the end of February. Significant reductions in the availability of Russian energy, especially natural gas, in Europe following the removal of almost all Russian supply to the region were the key causes of a substantial increase in global energy prices in 2022. Energy commodities ended up being one of the few asset classes to post gains during 2022, as inflation and subsequent rapid interest rate hikes by central banks saw a broad-based sell-off of riskier assets and the long bull market in equities came to an end.

The developments in energy markets during 2022 have been described as the “first global energy crisis” by the IEA’s Fatih Birol. With natural gas in Europe averaging at several times its value from the last few years, the incentive for Europe in particular to further diversify and decarbonize its energy supply has been amplified. This urgency was reflected in the political landscape of 2022. The RePowerEU program and the Inflation Reduction Act in the US in particular will provide significantly expanded provision and financial support for the build-out of clean energy over the coming years.

The goal of achieving net zero emissions by the middle of the century has never been shared by more governments and corporations. As of the end of 2022, countries representing more than 90% of global GDP had made a commitment to net zero emissions. An increase of 10 percentage points compared to the end of 2021, according to the University of Oxford’s Net Zero Tracker. Emissions coverage has increased by an estimated 6 percentage points to 83%, compared to 2021. While this trend is encouraging, the hurdles to achieving these goals remain significant.

In particular, the events of 2022 and the accompanying high prices, especially for gas and electricity, have put the focus back on security of supply. Europe’s natural gas infrastructure is being rapidly retooled to shift from a high dependency on pipeline imports of gas from the east to a more diversified portfolio that includes much larger volumes of LNG from the global seaborne market. The urgency of ensuring basic supplies of energy to consumers and businesses took precedence over long-term decarbonization goals during 2022, and it is entirely possible that this will be the case again over the next couple of years. Associated trends, such as resurgent coal demand for power generation and subsequent higher emissions intensity, can also be expected to recur. At the end of 2022, policymakers were occupied with the question of how severe recessionary effects will be during 2023, especially in Europe, where many observers have pointed to an existential threat to the viability of the regional manufacturing base.

Nevertheless, over the medium and long term, OMV fully expects the structure of energy supply and demand to undergo drastic changes as efforts are made at varying speeds and with varying degrees of success to decarbonize electricity production, transport, industry, and other carbon-intensive sectors of the global economy. A viable path to a net zero global energy system by the middle of the century has to include a diverse range of technologies being employed in place of the traditional fossil and biomass energy sources. No single energy source should account for more than a quarter of total primary energy supply by 2050, according to the most recent update of the IEA’s Net Zero Emissions by 2050 Scenario.

On a global level, there remains a significant implementation gap – the difference between the combined pledges on emissions reductions and the actual measures that have been taken to achieve them. Compared to 2021, additional announced pledges on emissions reductions from India and Indonesia have served to reduce the perceived gap between announced pledges and a net zero energy system. However, major uncertainty remains. This is reflected in the range of modeled shares of the different energy sources in the IEA’s most recent World Energy Outlook: By the end of this decade, oil and gas will supply only 46% of total global primary energy in the net-zero scenario (down from 53% in 2021). However, this number remains essentially unchanged in the IEA’s Stated Policies Scenario (STEPS) by 2030, and falls only to 47% by the middle of the century.

IEA scenarios based on stated policies and announced pledges foresee oil demand remaining robust at least through to the end of the decade (these scenarios assume compound annual growth rates of 0.8% and 0.2% respectively through to the end of the current decade for total global energy supply). In these environments, the question of underinvestment in upstream oil and gas remains a pertinent one for the energy system as a whole. Various analyses have shown that capital expenditure in E&P has so far not responded to the marked increases in oil and gas prices observed since the depths of the pandemic-related sell-off in the middle of 2020 in the same way that was characteristic of previous commodity cycles.

World total primary energy supply

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Despite these factors long term assumptions remain largely unchanged. For example, the expectation that advanced economies will see the most notable negative growth trends for fossil fuels over the medium and long term remain in place. The EU sees faster declines in oil demand than any other large country or region except Japan in the IEA’s projections. The CAGR of EU oil consumption for 2021–2030 is –2% in the STEPS, falling to –3.8% in the Announced Pledges Scenario (APS). China, the engine of global oil demand growth over the last two decades, sees a CAGR on oil demand of less than 1% up to 2030 even in the STEPS.

In addition to an entrenched demand-decline trend in the domestic market, the European refining industry is likely to face ongoing headwinds in the form of higher utility and fuel costs vs. the other refining hubs, especially those in the US and the Middle East. While these higher costs are to some extent offset by higher market prices for refined products, they are nevertheless expected to continue to weigh on European competitiveness. Meanwhile, consensus demand assumptions continue to imply an advantage in the market for players with petrochemical integration. It is notable that, even in the IEA’s Net Zero Emissions by 2050 Scenario, oil demand for non-energy use falls by only 6% by 2050 vs. 2021 levels (vs. a decline of almost 80% for oil demand overall).

Global petrochemicals¹ demand

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Oil demand for chemical production is expected to increase, primarily originating from rising demand in emerging markets and closely linked to GDP development. By 2030, oil demand for chemical production will rise by about 2% per year. Approximately 80% of chemical and plastic demand growth will be concentrated in emerging markets, mainly Asia, until 2030 and beyond. This region represents most of the global population growth and the corresponding potential for improving living standards. For mature markets such as Europe, North America, and Japan, demand growth is anticipated to remain healthy in the long term, in line with economic development, but growth rates are expected to slow.

Global virgin polyolefin demand

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Polyolefins are the largest market segment in producing plastic goods. Demand for virgin polyolefins will continue to grow at a rate above global GDP until 2030, driven by the Asian market. Polyolefins will remain essential for various industries, including packaging, construction, transportation, healthcare, pharmaceuticals, and electronics.

Global recycled polyolefin demand

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The key success factor for medium- to long-term sustainable business models is growth in renewable feedstocks, bioplastics, and the development of circular solutions. Recycled polyolefin demand is expected to grow at a rate significantly above global GDP until 2030, with Asia having the largest share.

Over the next decade, key focus areas for the plastics industry will be continued improvement in waste collection, the redesign of plastics and their applications for increased recyclability, and improvements in recycling technologies. Global recycling rates are projected to increase almost threefold by 2030.

OMV uses two frameworks for future market assumptions. For 2022, these are positioned as follows:

1. A base case that assumes OECD economies follow a decarbonization path more aggressive than the IEA’s Announced Pledges Scenario, but falling short of the net zero oil demand path, while non-OECD economies progress in line with announced pledges.
2. A stress case that sees a faster transition away from fossil fuels than that in the Sustainable Development Scenarioused in the 2021 IEA report, though not as aggressive as the Net Zero Emissions by 2050 Scenario. This stress case represents a trajectory for oil demand declines that would correspond to the upper limit of the temperature increases foreseen in the UN climate goals from Paris, with net zero achieved in the global energy system between 2050 and 2070.

For details on climate change-related risks and their management, see the chapter Risk Management and Note 2 of the Consolidated Financial Statements, as well as the OMV Sustainability Report.

Note: In its 2022 World Energy Outlook, the IEA did not include the Sustainable Development Scenario (SDS), which has been used as a reference point in the past by OMV. In terms of cumulative emissions for the global energy system, the SDS is most closely comparable to the Announced Pledges Scenario (APS).