Markets have felt the hand of the summer doldrums and none more so than oil. The tepid action of yesterday outlines a market that is slightly fatigued and while any number of the news agenda is able to push and pull prices hither and tither if accelerated, none are particularly fresh and are in the main already accounted for. Such listlessness has been made worse by the poor showing of data from China, and unless the Plenum shows signals of at least nodding to stimulus, other than convoluted property plans, those that seek demand stories will be much disappointed. Not even further Houthi missile attacks on shipping in the Red Sea and an unconfirmed one in the Mediterranean is enough to give a least a hiccough to oil's retiring state.

Wider markets concern themselves with clues from any talking head that belongs to the US Federal Reserve and what might be uttered before the blackout this weekend in front of the rate decision at the end of the month. The pinnacle of voices spoke yesterday, and Jerome Powell's recognition of confidence in lower inflation readings and progress is met with a rather cool reaction. Markets are normally very reactive to anything that the FED chair might say and have been looking for brighter language for some time. However, it does seem as if the fervour of markets has been cowed due to the assassination attempt and the crowning of Donald Trump as the Republican nomination for the Presidency. US politics will continue to wreak havoc with investor confidence for months and it is little wonder market participants are at present a little reticent.

It is Happening, but Slower than Expected

At least once a month, usually after the latest monthly updates on global oil balance are released, we reiterate the ever-widening chasm in global oil demand prospects that exists between OPEC and the IEA for this year as well as for 2025. The diverging views are equally discernible for the long run. Since the 1970s peak oil demand had always been around 50 years away but with climate change threatening to run politically, socially and economically amok, this interval has considerably narrowed. Yet, by how much has been a hotly and fiercely debated topic in the last two years. The view of the IEA, expressed in its latest Oil 2024 annual report, is that demand will peak in 2029 at 105.6 mbpd and start contracting in 2030 as the prevalence of electric vehicles increases, efficiency improves, and renewables will play an unavoidably critical role in generating power.

OPEC was quick to retort by claiming that the scenario rolled out by the IEA is dangerous, particularly for consumers and ‘will only lead to energy volatility on a potentially unprecedented scale’. Up until 2045, OPEC foresees a total jump of 25 mbpd in non-OECD oil demand as China and India alone contribute 10 mbpd to this growth. In 20 years’ time the world will need as much as 116 mbpd of oil. Last week, by releasing its influential annual Energy Outlook, BP also shared its prognosis.

The headlines commenting on the gist of the findings were intriguing. Reuters picked up on the 2025 peak oil and pointed to the hastening growth in renewable energy. The FT went with the soundbite of ‘BP raises forecasts for oil and gas demand as clean energy switch slows’. In their contexts both bullet points are factually correct. BP does see oil demand peaking soon and they did revise upwards its estimates from last year. The most reasonable interpretation of the basic message is probably to conclude that the transition is unequivocally under way, but it progresses more leisurely than previously anticipated.

The projections are based on two scenarios: Current Trajectory (significant temperature overshoot) and Net Zero (Paris 2015 consistent). The authors emphasize that these are not predictions but implications of different assumptions. The key takeaways are as follows: Energy demand grows faster in the developing part of the world. Its growth depends on improvements of energy efficiency. The composition changes, the share of fossil fuel is on the descent. Oil demand declines but will have a crucial role in the energy mix in the next 10-15 years.
The data table sums neatly up the hurdles the world needs to clear when navigating through the daunting challenges of transition. Oil’s share in the energy mix would be 23% by 2050 under Current Trajectory and 12% in the Net Zero scenario. The weighting of renewables (including bioenergy) is seen at 27% and 57%, a substantial difference. The gap to 100% is then filled by natural gas, coal, nuclear and hydro energy. Coal, being the most polluting of fossil fuels, would weigh 17% in Current Trajectory and 5% in Net Zero.

Oil demand, the report concludes, will peak this decade before starting to fall as the road transport sector will consume less refined fuel. In Current Trajectory, global oil demand will decline to around 75 mbpd by the middle of the century but will plunge to 25-30 mbpd under Net Zero. This contraction will mainly be manifested in the developed part of the world whilst in emerging economies this demand will stay relatively resilient amidst rising living standards and auspicious economic prospects. The report predicts that the fall in oil demand will be chiefly borne by non-OPEC+ producers. In Current Trajectory OPEC+ will increase it market share whilst non-OPEC+ output will decline with US shale production falling 50% from its peak by 2050 to 8 mbpd. Under Net Zero both OPEC+ and non-OPEC+ production will understandably plunge and non-OPEC+ production will account for 55% of this decrease. The differences between the two outlined scenarios are vast and emphatically indicate that there is no place for complacency in the war against a warming planet.

Overnight Pricing

© 2024 PVM Oil Associates Ltd