Both equities and oil struggled to make significant advances ahead of the US Thanksgiving holiday. Financial data was a mixed bag with a somewhat negative slant. Buoyant US consumer spending and a fall in initial jobless claims mirror a solid economy. Inflation, however, as reflected in the Personal Consumption Expenditure price index, is retreating at a slowing pace. This, coupled with growing concerns about the adverse impact of Donald Trump’s pledged trade policies, raises fears of a halt in lowering the costs of borrowing next year. On this side of the Atlantic Ocean, economic prospects have deteriorated considerably as the French plan to cut spending by €60 billion and raise taxes threatens to bring down the government.

Oil was equally sluggish. WTI and Brent settled broadly unchanged due to the on-the-close buying spree. It would be convenient to point the finger at the Israeli-Hezbollah ceasefire agreement, which mercifully holds but one needs to look for a reason for the relative pessimism elsewhere. The decline of 1.8 million bbls in US crude oil stocks caused by the drop of 1.9 mbpd in net imports was more than countered by the 3.3 million bbl rise in gasoline and the 400,000 bbls increase in distillate inventories. Further pressure arrived from equities and judging by the fall in gas prices and the narrowing of the Gasoil backwardation weather-related support has also been pulled from under our market. A temporary boost could come from the upcoming OPEC+ meeting, (which, according to CNBC, has been postponed to December 5), should the group decide to delay the tampering of cuts once again and the reemergence of colder temperatures might also help oil rally. Yet, the growing realization of the potentially negative impacts of US tariffs and trade wars, and the widely anticipated supply excess next year will ensure that rallies are viewed as irresistible selling opportunities.

Not Exactly Nimble but It’s Happening

In Tuesday’s note, we had a look at Donald Trump’s appointees and observed that his choice for the position of Energy Secretary represents his fossil fuel-friendly views. The incoming President is a staunch advocate of this type of source of energy and is an avid denier of climate change. He is more than willing to dismiss scientific facts that global warming is primarily man-made. US oil producers will enjoy his full support in the next four years, although US crude oil output will likely be driven by market forces and shareholder demand rather than by the administration’s policies.

We then turned our attention to the outcome of the COP29 climate summit yesterday, where fault lines between wealthy and poor nations, between producers and consumers were ever so discernible. The key takeaway of the climate talks was that the transition from fossil fuel to alternative energy is a costly undertaking and lack of funding or the reluctance to provide it acts as a severe impediment in the fight against global warming. As the phrase suggests, it is a global problem requiring a global solution, which is not forthcoming. As a result, the weight of fossil fuel, including oil, in the energy mix will remain dominant in the foreseeable future.

Considering that both the supply and the demand sides of the oil equation show little appetite to blink and make consequential way for alternative energy, the question arises whether the transition is actually happening. To get a rudimentary picture of the ongoing changes in the energy markets it seems reasonable to review the major factors -supply demand and refinery capacity- that have influenced the US oil landscape in the last decade or so; after all the US is one the biggest of everything: suppliers, consumers and emitters. To do that, we use the annual averages of the weekly data provided by the EIA on Wednesdays.

To begin with supply, the numbers back up the general view on US oil output. With the emergence of the shale industry production grew from 7.5 mbpd in 2013 to 13.2 mbpd, so far, this year, a record high. There was a blip during the pandemic when the eulogy of the shale sector had been written but after a wave of consolidation producers showed admirable resilience to recover. The lifting of the crude oil export ban in 2015 provided considerable help for producers and so did the inclusion of WTI Midland in the Brent basket in 2023. Incentives to keep pumping will plausibly persist for years to come.

The growth on the demand side, on the other hand, seems to stagnate. Refiners supplied 19 mbpd of products in 2013, which gradually rose to 20.8 mbpd by 2019. Covid lockdowns pushed demand over the precipice in 2020. After bottoming out at 18.4 mbpd in 2020, the recovery began but demand has never reached the pre-pandemic level as it averaged 20.2 mbpd last year with the year-to-date figure being the same. What is even more telling, as far as the transitioning away from oil is concerned, is that both gasoline and distillate consumption has most probably peaked. Weekly data shows that motor fuel consumption, which reached 9.3 mbpd in 2019 is now around 8.8 mbpd this year. On the distillate front, refiners have supplied 3.7 mbpd this year versus the pre-Covid reading of 4 mbpd. Conversely, the ‘other oils product’ category, which includes liquids that condense in natural gas wells, liquified gases and unfinished oils, has experienced a jump of 500,000 bpd in demand from 2019 to date.
Refiners are adjusting to new realities. Operating capacity, which was 18.4 mbpd in 2019 has fallen to 18 mbpd this year with gross inputs declining from 17 mbpd 5 years ago to 16.5 mbpd this year. Some refiners that halted operation during the health crisis did not reopen or have been converted. 

When extrapolating these changes to the global market the picture that emerges is mixed at best and ominous at worst. The transition is taking place, but much more slowly than required. Could it be hastened? The answer is probably no, due to the absence of coherent global political will and intention. Until renewable energy becomes cost-competitive at scale, consumers will consume the most economical energy resource, and suppliers will keep supplying it, simply because demand is there. In the interim, global temperature increase will not be reined in, floods, and wildfires will wreak havoc all over the world, migration from uninhabitable places will intensify with all its political and social repercussions. Maybe widespread riots and disturbances will be needed to put the world on a steep trajectory to halt the rise in global temperature and meaningfully reduce the emission of greenhouse gases.

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