The Future of Oil
There has been considerable speculation and discussion about peak oil demand in recent years but supply is what dominates oil-market behavior.
I have accordingly made a projection of world liquids supply out to 2050 (Figure 1). It is, of course, tentative and undoubtedly wrong but it reflects considerable integration of credible analyses along with my own interpretations of present trends.
I expect world liquids supply to follow an approximate plateau of about 101 million barrels per day (mmb/d) for the next decade, and then to decline to less than 80 mmb/d by mid-century. A comparison with other projections suggests that IEA “net zero” scenario is improbable and BP “accelerated” scenario, while more probable, is also unlikely.
Figure 2 shows part of that projection to 2030 and includes the various components of liquids supply in addition to crude oil and condensate. Based on recent history and present trends, it seems unlikely that crude and condensate will recover to its 2018 level. The main reasons are restricted capital and credit, economic contraction, affordability, and consumer behavior change.
As David Fickling recently stated,
“Ultimately, it will be central banks that will read crude its last rites.”
The growth in world liquids is because of natural gas liquids, 85% of which do not even come from petroleum but from natural gas production.
Most of the NGL increase going forward after about 2027 will be from decreasing volumes of crude oil and condensate, and associated reductions in other liquids and refinery gain (Figure 3). Natural gas liquids supply is expected to reach a plateau of about 14 mmb/d by 2030 and to then increase to approximately 14.5 mmb/d by 2045.
The current industry narrative is that demand is strong and lagging supply will result in higher oil prices later in 2023. Some of that story is true but I do not see any structural reason for longer-term high prices and correlative pressure to increase supply.
Figure 4 shows blended OPEC and EIA supply-demand data. It suggests a potential deficit of about 1.7 million barrels in the second half of 2023. That is similar to deficits in the second half of 2021 and 2022 when WTI averaged $74 and $87, respectively.
It is difficult to understand why similar deficit levels in 2023 should lead to a substantially different price outcome. That seems especially valid since forecasts indicate a return to an approximate supply-demand balance in 2024. Markets are cheap and hate to overpay.
Despite the likely return of demand to pre-Covid levels suggested in Figure 4, the long-term supply and demand trend lines have been reset lower following the Covid economic disruptions. That is a downward shift from the rising 50-year supply-demand pattern.
I am, therefore, skeptical that current analyst expectations for critical tightening of oil supply will result in a sustained price rally to $90 or $100 although those levels may be reached for relatively brief periods. The macro picture of capital supply, affordability for consumers, and progressive economic contraction seem compelling to me in the medium to long term.
The supply and price shocks that followed Russia’s 2022 invasion of Ukraine will probably have a lasting effect on global markets. This coincides with a reversal in the globalization of trade that led to commodity deflation throughout much of the last 30 years.
Supply-chain disruptions have forever changed how markets look at reliance on fragile or hostile nations for life’s necessities including oil. Climate change is also forcing reevaluation of energy assumptions that have prevailed since the 1970s.
Some of these concerns are seen in reduced exposure of managed money to oil futures contracts. WTI net long positions have fallen 70% since mid-2018 and open interest has fallen 40%. Net longs are 59% lower since June 2021 and open interest is 59% lower.
Analysts focus on demand but supply is what drives oil markets. Demand is important but markets cannot control demand. They can, however, use price as a lever to encourage drilling when there are concerns about under-supply, and to discourage drilling when over-supply dominates.
The way that most analysts use supply and demand is unrealistic. It assumes that markets are ordinarily in equilibrium with occasional periods of disequilibrium. The truth is that, like all complex systems, markets are rarely in equilibrium except in the human imagination.
There is always concern about demand destruction when oil prices are high but history shows that supply destruction is at least as important as demand destruction. In fact, supply decreased more than demand during the oil-price shocks after 1973. More than 20 mmb/d were removed from world markets because of lower supply compared with 15 mmb/d from lower demand since 1974 (Figure 6).
The world is not running out of oil but it takes capital and time to increase supply. The medium- to long-term should be increasingly affected by limited supply growth. The market will send price signals to producers based on its sense of medium-term supply urgency. Prices will rally until inflation and a fragile economy end the rally. This is the dialectic that I expect will dominate oil markets for the rest of this decade and probably beyond.
These themes are playing against a backdrop of massive global debt load and the imaginary recovery from the economic closures of 2020 and 2021. Old-paradigm analysts believe that oil demand must revert to ever-higher levels which supply simply cannot meet. In fact, the opposite is true. The correct oil paradigm is supply-driven and price-constrained.
Like Art's Work?
Share this Post:
Read More Posts