The three harbingers of stagflation are tepid economic growth coupled with sluggish job market and high inflation. Although US jobless claims fell yesterday, the country’s economic expansion in 1Q slowed whilst the rise in consumer prices unexpectedly jumped. The drop in initial claims for unemployment benefits is, in itself, a headache for the Fed as one of the precursors of lowering borrowing costs is a rise in unemployment yet its rate fell from 3.9% in February to 3.8% in March. The real blow, however, came from the personal consumption expenditure (PCE) price index, which showed an increase of 3.7% in 1Q 2024, excluding food and energy, well over forecast and the target of 2%. (The March PCE will be released today with a forecast rise of 2.6%, both headline and core.) US GDP growth of 1.6% that also came in under expectations might also be deemed a welcome development confirming the effectiveness of the recent monetary tightening, nonetheless it was the PCE price index that drove sentiment.

Equities dropped, bond yields rose as investors, once again, scaled back expectations for a rate cut. The CME FedWatch tool now implies a less than 50% probability of such a move this year. The outlook turned cloudier, even though equities staged a decent recovery from the initial drop as US Treasury Secretary Janet Yellen rushed to re-assure investors that the country’s economy was plausibly stronger than insinuated by the data, which might well be revised higher. The assumption of a delayed rate cut put pressure on the dollar, which, in turn helped oil rally around $1/bbl after an initial drop also aided by intensifying Israeli air strike on Rafah. As impressive as yesterday’s march higher was, oil prices, as so aptly put in yesterday’s note, are not in the hands of the oil market. The underlying fundamental picture has not changed, and it will take material disruption in the supply of oil to resolutely challenge the year’s high of $92/bbl basis Brent.
 

Losing its Mojo?

The vast chasm in demand predictions between the IEA and OPEC has been frequently discussed on the pages of this report over the past two years. To re-iterate the latest findings from this month, the IEA believes that global oil demand will average 103.18 mbpd this year with 2H consumption seen at 103.85 mbpd. The same figures from OPEC are 104.45 mbpd and 105.25 mbpd, the deviations are 1.27 mbpd and 1.40 mbpd respectively. This decibel of disagreement then increases to an almost incomprehensible 2.03 mbpd for the whole of 2025 – 104.30 mbpd versus 106.33 mbpd.

There are two blatantly obvious and related reasons for this divergence. Firstly, the views on the speed of transitions from fossil fuel to renewable energy vary substantially and secondly, such a difference in prospects is somewhat understandable as it is a dive into the unknown. One of the most salient issues when forecasting future oil demand is how much fuel the road transportation sector will be needing going forward. In their latest long-term outlook, the IEA puts this figure at 41.1 mbpd in 2030 under its STEP (stated policies) scenario, and OPEC estimates it at 48.8 mbpd. These represent 40% and 43% of total oil demand.

More than half of combined road transportation fuel demand comes from gasoline. Consequently, correctly predicting the prevalence of electric vehicles (EVs) will go a long way in establishing how fast the transition may progress. The IEA, in its latest Global EV Outlook released this week, remains upbeat about the issue. It sees an explosion in the combined sales of battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs) and fuel cell electric vehicles (FCEVs) over the past 10 years and the trend is likely to continue in the future, not so much in percentage terms, as the baseline in the mid-2010s was understandably low, but in absolute numbers.

A total of 200,000 electric cars (ECs) were sold in 2013 and the growth in annual sales was not linear but exponential. It climbed to 2.06 million by 2018 only to fall back a little the following year but once the pandemic got under control there was no looking back and by last year 13.8 million ECs were purchased worldwide. By next year this number, the IEA prognosticates, will jump above 20 million, reaching 40 million by 2030 and 57 million by 2035. The predicted rise in the sale of ECs entails a growing market share, which by 2035 is expected to approach 60%, which compares very favourably with the 4.2% of all new car sales registered in 2020.

This estimated astronomical advance in EVs sales will take place at the expense of oil demand. The energy watchdog of OECD nations predicts that the 100,000 bpd oil displacement due to the sale of EVs seen in 2020 will relentlessly climb to 1.4 mbpd by next year, to 4.2 mbpd in 6 years’ time and to 7.8 mbpd by 2035. The relevance of road transportation fuel in the oil basket will gradually erode from 43% in 2022, to the above-mentioned 40% in 2030 and to 36% by 2050, according to last year’s World Energy Outlook by the IEA.

By scrutinizing the latest developments, however, one cannot help but think that the trend outlined in the Global EV Outlook will turn out to be somewhat more tenuous than hoped for. There is an ongoing price war between electric car makers. It is embodied by the recent price cut introduced by Tesla in China and Germany having been forced to start reducing the price of its models since the beginning of last year. The reason for the move is twofold. Competition from traditional carmakers and Chinese newcomers is getting ever more intense and demand growth for EVs seems to have been overestimated. The fierce rivalry amongst EV makers and the resultant cheapening of prices might serve to spur demand and hasten the transition. Other factors, nonetheless, might act as a brake on the healthy rise in EV sales. These include the comparative price disadvantage of EVs to traditional cars, the prevalent lack of charging infrastructure, the increase in borrowing costs and, most significantly, the relaxation of emissions rules. There is absolutely no doubt that the growing popularity of EVs is an irreversible process, yet what we might find a few years down the line is that current forecasts are painting a more sanguine medium-term picture than reality underpinning the case for an upward amendment in road transportation fuel, including gasoline, demand.

Overnight Pricing

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