Peak oil demand forecasts turn sour as demand continues to grow

In the minds of many news consumers, oil is disappearing. Coal too. Gas too, although this can stay on for a bit longer. After all, we are entering a new era of clean energy, and while it will take some time to get there, it is our only option for a future. And fossil fuels have no place in this future.

So the latest rise in oil, gas and coal prices must have come as a shock to this hypothetical news consumer. It turns out, according to this gathering, that the news does not always reflect reality. Neither do oil and gas price forecasts. Remember when there was a glut of gas, not later than last year? Everyone said it would persist, keeping prices low. But this is not the case. The glut ended quite suddenly this year.

Predicting the prices of oil – or, apparently, gas – is a notoriously uncertain matter. This, however, does not prevent hundreds, if not thousands of people from doing it on a daily basis, with varying degrees of success. Right now, most forecasters seem to expect prices to continue to rise because there are simply too many factors supporting them.

In the longer term, predicting oil prices becomes even more difficult. Right now, this is particularly difficult as few forecasters seem to have anticipated the current rally, and now a wave of revisions is underway, according to a New York Times report. The revisions, however, do not affect average oil prices this year and next. They relate to peak oil demand: one of the few conditions necessary for any net-zero scenario.

The dominant narrative is that the rush for renewables will kill growing oil demand in a few years, a decade at most. Yet this account never predicted the current rally for some reason. He never considered the possibility of increased demand for coal, not only in the usual place — emerging economies — but in countries like the United States, where coal consumption is set to increase for the first time since 2014. This year’s energy crisis has disrupted many narratives.

The near-term price outlook is quite fascinating. Inventories of crude oil are dwindling around the world and OPEC + is sticking to its initial decision to add just 400,000 bpd to combined monthly production. However, it does not even do this because some of its members are struggling to meet their production quotas due to the underinvestment that has plagued them for years.

Demand, meanwhile, is increasing, with the energy crisis adding anywhere between 500,000 bpd and 750,000 bpd to the world daily average. This, combined with reports that US crude oil inventories are about 6% below the five-year average for this time of year, and that OECD inventories are 162 million barrels lower. pre-COVID five-year average, has been very effective in keeping prices above $ 80 a barrel and boosting triple-digit price predictions.

This is what usually happens when prices rise, but this time the rise was not exactly the usual one, being part of the commodity price cycle. This time around, prices were pushed up by a severe shortage of energy sources, fossil fuel sources. This fact could have sparked a much needed discussion about governments’ approach to the shift to renewables, but it is not, not publicly. Still, it raised doubts that the change would work exactly as governments expect. And the price forecasts reflect these doubts.

Some are already talking about $ 200 from Brent and not only talking but bet above. The bets may be crazy, but they reflect increased uncertainty about the outlook for oil demand, much more accentuated than usual. In reality, Brent going up to $ 200 a barrel could only happen if there is a big cut in production, and that is unlikely to happen as early as next year, if ever.

But besides crazy bets, there are also other signs that the demise of fossil fuels has been greatly exaggerated. Fund managers return to oil and gas stocks, Reuters reported this week. Despite the push towards ESG investing in recent years, funds are now keen to increase their exposure to oil and gas, thanks to the rise in stock prices this year. Energy stocks significantly outperformed the S&P 500: they were up 53.8% in the past month, compared to 20.2% for the broader index.

Now the bigger question is about the longevity of the rally. No oil price rally lasts forever but, according to the NYT, this time around there are two rather different explanations that would determine the long-term outlook for oil price movements. One concerns a short-term price increase due to factors related to the pandemic. The other is a disparity between program ambitions and the capacity to achieve those ambitions.

Some would like to bet on the first explanation: that the current rise in oil prices is little more than a fossil fuel version of the dead cat rebound and that fossil fuels are really disappearing under the advance of the world. wind, solar and hydrogen. However, the second explanation rings fairer in the context of investment decisions.

A recent report from UNEP warned that the oil and gas production plans of the 15 largest producers are in great contradiction with the emission targets of the Paris Agreement. In other words, these top 15 producers continue to invest in oil and gas, despite their emissions ambitions, including their own net zero targets. Oil might not hit $ 200 next year or never, but it might end up being used and widely used for longer than many might have hoped and believed.

By Irina Slav for Oil Octobers

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