After last week’s ghastly performance, the week has started on the front foot. Oil has re-gained some of its mojo and rallied hard. WTI settled $1.35/bbl and Brent $1.23/bbl higher. One of the chief motivators was the recent weakness itself as some bounce is always due in a market trending southwards, only the timing of it is usually dubious. The latest rebound happened yesterday simply because there was no disheartening news out of China. Shorts felt tempted and compelled to cover some of their positions because the People’s Bank of China lowered its one-year loan prime rate by 25 basis points in line with cuts in other policy rates earlier. Its impact on consumer confidence and spending, nonetheless, remains questionable.

The unabating conflict in the Near East and Israel’s relentless military campaign in Gaza and Lebanon, together with the sporadic attacks from the other side on Isreal occasionally revives fears of plausible supply disruption. US Secretary of State Antony Blinken once again travels to the region to attempt to broker a ceasefire. Past endeavours, however, suggest that his efforts could prove, alas, a fool’s errand once again. It would be premature to rule out further upside potential, particularly if last week’s US stock data that showed drawdowns across the board is repeated. Yet, the upside should be limited. Physical markets appear to be in a more than comfortable state. Crack spreads are reluctant to recover, and the world’s prominent crude oil marker, Brent, is now discounted to its forward peers eliminating the sometimes-hefty premiums it commanded in previous months.

No Alignment of Views

The futures and forward curves are meant to provide information about where oil prices are headed in weeks, months, and years ahead. They are naturally based on estimates of supply and demand. They change on a second-on-second basis, and hardly ever prove accurate, yet they play an invaluable role in investment decisions. Deviating prognoses on the oil balance throw a spanner in the works and make any decisions to invest in oil projects akin to tossing a coin.

Divergences are particularly tangible in the rhetoric and forecasts provided by two of the most important forecasters, OPEC and the IEA. A case in point is the ever-so-wide chasm in Chinese oil prospects, which is bluntly mirrored in the views of the CEO of Saudi Aramco and the head of the International Energy Agency expressed during an energy conference held in Singapore. The Saudi oil company boss expects healthy jet fuel and naphtha demand from the world’s second-biggest economy. An expanding chemical sector will also underpin growth in consumption and so will the recently announced stimulus packages. In the long run, global oil demand will be supported by the Global South. Consumption might not dip below 100 mbpd until after 2050, even though the transition will power ahead. Conversely, the IEA believes that Chinese oil demand growth will remain weak in 2025, notwithstanding recent efforts to stimulate the economy. The country’s share of global oil demand growth is gradually diminishing as the prevalent use of electric vehicles replaces a significant proportion of gasoline and diesel consumption.

The differences are routinely laid bare in the monthly reports, which are repeatedly discussed on these pages. The divergence, however, is also echoed in long-term forecasts. OPEC published its findings throughout 2050 in September and the IEA released its own version last week. Before delving into the numbers, it is worth citing from the forewords. According to OPEC, ‘…there has been further recognition that the world can only phase in new energy sources at scale when … acceptable for consumers and with the right infrastructure in place.’ The IEA’s World Energy Outlook, on the other hand, finds that ‘…deploying cost-competitive clean energy technologies represents a lasting solution not only for bringing down emissions but also for reducing reliance on fuels that have been prone to volatility and disruption’. OPEC’s rebuttal was swift and sharp. It accused the energy watchdog of the developed world of distorting the past and present by forewarning peak oil demand this decade.

The three major themes of the latest World Energy Outlook are energy security, clean energy transition and uncertainty. The IEA emphasizes in its ‘Overview and key findings’ sections that there is a real risk of disruption to near-term oil and gas supply because of the Middle East conflict. Looking further ahead, energy demand growth will slow due to efficiency gains and this expansion will be met almost exclusively by clean energy. Electricity demand will grow faster than energy demand and renewables will be the main source of this expansion.
The IEA has cut its total final energy consumption estimates for 2050 under its Stated Policies Scenario (STEPS) from 536 EJ (exajoules, one unit of which equals to 1.0E-15 kilojoules) to 533 EJ year-on-year. Oil’s share will descend from 176 EJ to 169 EJ, consequently, its share in the total energy mix will decline from 33% to 31 % in 26 years. In terms of mbpd, the world will need 93.1 mbpd of oil in 2050 under STEPS after peaking at 101.7 mbpd in 2030. It is a considerable downgrade of 4.3 mbpd compared to 2023. The absolute figure is 27 mbpd less than predicted by OPEC. North American oil demand was revised down by 700,000 bpd whilst European consumption by 1 mbpd.

The world’s liquid production will decline from 99.1 mbpd in 2030 to 90.3 mbpd in 2050 under STEPS, broadly unchanged from last year. Non-OPEC production is seen at 54.2 mbpd with OPEC output at 36.1 mbpd, some 4.7 mbpd less than in 2023. When demand is falling faster than supply, refining capacity will shrink. It will have fallen from 106.1 mbpd in 2030 to 103.9 mbpd 20 years later with runs plummeting from 84.1 mbpd to 78.1 mbpd during the same period. It must be reiterated that the above forecasts are based on the Stated Policies Scenario. Figures under the Announced Pledges Scenario widely differ (ie. more bearish for oil), nonetheless, they conspicuously highlight the differences between OPEC and the IEA confirming that the major peculiarity of the oil market will be volatility as the speed of the transition remains a major point of contention. To paraphrase Benjamin Franklin’s famous saying: in this world nothing can be said to be certain, except death, taxes and the irreconcilable dispute on demand between OPEC and the IEA.
 

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