Crude Oil News: Endgame for Oil? OPEC prepares for an era of falling demand | International business news
The pandemic has lowered daily crude consumption by up to a third earlier this year, at a time when the rise of electric vehicles and the switch to renewable energy sources were already prompting to revise downward forecasts for long-term demand for oil.
This has prompted some officials at the Organization of the Petroleum Exporting Countries, the strongest proponent of petroleum since its inception 60 years ago, to question whether this year’s dramatic slump in demand signals permanent change and how to deal with it. at best supplies if the age of oil is drawing to a close.
“People are waking up to a new reality and trying to navigate it,” a source close to OPEC told Reuters, adding that “the possibility exists in the minds of all key players” that consumption never fully recovers.
Reuters interviewed seven current and former officials or other sources involved with OPEC, most of whom asked not to be named. They said this year’s crisis that pushed oil below $ 16 a barrel prompted OPEC and its 13 members to question long-held views on the outlook for demand growth.
Just 12 years ago, OPEC states had liquidity when oil peaked above $ 145 a barrel as demand increased.
Now it faces a dramatic adjustment if consumption begins to decline permanently. The group will have to manage its cooperation with other producers, such as Russia, even more closely to maximize the drop in income and will have to work so that relations within the group are not frayed by a fratricidal race to defend market share. in declining companies.
“The work of Opec will be more difficult in the future due to the decrease in demand and the increase in non-Opec production,” said Hasan Qabazard, head of research at Opec from 2006. to 2013 whose job now consists of advising hedge funds and investment banks on OPEC policy.
An official, who works in energy studies at the petroleum ministry of a major OPEC member, said oil demand shocks had in the past led to permanent changes in consumer behavior. He said this time it was unlikely to be any different.
“Demand is not returning to pre-crisis levels or it is taking time for it to happen,” he said. “The main concern is that the demand for oil will peak in the next few years due to rapid technological advances, especially in car batteries.”
In 2019, the world consumed 99.7 million barrels per day (bpd) – and Opec forecast an increase to 101 million bpd in 2020.
But global lockdowns this year that brought planes to a standstill and removed traffic from the streets, prompted Opec to reduce the 2020 figure to 91 million bpd, with 2021 demand still below 2019 levels.
Predict the peak
Producing countries, energy analysts and oil companies have long tried to determine when the world will reach “peak oil,” the point after which consumption begins to drop permanently. But demand has grown steadily every year, with occasional exceptions during an economic downturn.
Nevertheless, Opec lowered its expectations. In 2007, he predicted global demand to reach 118 million bpd by 2030. Last year, his forecast for 2030 had fallen to 108.3 million bpd. Its November report is expected to show another downward revision, according to an Opec source.
OPEC officials declined to comment on its outlook or its request policy for this article. But officials said history shows Opec’s ability to adapt to changes in the market.
Consumption forecasts vary outside of OPEC. Oil companies have slashed the outlook for long-term crude prices as the outlook for demand fades, reducing the value of their assets.
Global consultancy firm DNV GL estimates demand likely peaked in 2019.
The percentage share of oil in the global energy mix has steadily declined over the past decades, from around 40% of the energy used in 1994 to 33% in 2019, even as the volumes consumed have increased with more than cars on the roads, the increase in air travel and a petrochemical industry that makes more plastics and other products.
Now that may change, as more electric vehicles roll out of factories and airlines struggle to recover from the pandemic. The International Air Transport Association (IATA) does not expect air transport to reach 2019 levels until 2023 – at the earliest.
“Once aviation recovers by the end of 2023, demand will return to normal – apart from competition from other energy sources,” said a second Opec official involved in the operations. forecasts, highlighting the difficulty of making forecasts in the context of a global trend to use more renewable energies. and other fuels.
This leaves Opec with a growing challenge. Most of the members of the group, which owns 80% of the world’s proven oil reserves, rely heavily on crude. Oil prices, now hovering above $ 40, are still well below the level most governments need to balance their budgets, including Saudi Arabia, OPEC’s de facto leader.
OPEC, whose production represents about a third of world supplies, is no stranger to crises. He handled supply shocks during the Gulf conflicts of the 1980s, 1990s, and 2000s and found ways to cope when rival non-OPEC producers turn on the taps, like the U.S. oil industry. shale over the past decade.
More recently, when the coronavirus crisis hit demand, Opec along with Russia and other allies, a group known as Opec +, agreed to record production cuts of 9.7 million b / j, the equivalent of 10% of world supplies. These deep cuts extend until the end of July.
Yet what comes next promises to be yet another test of Opec’s courage. Instead of dealing with one-off shocks, OPEC must learn to live with long-term decline.
“This trend will place an emphasis on cooperation between OPEC members, as well as between OPEC and Russia, each striving to maintain its market share,” said Chakib Khelil, Algerian Minister of Petroleum during a decade and twice president of Opec.
Some short-term challenges may come from OPEC, as Iran and Venezuela, both affected by US sanctions, seek to increase production or as production picks up in conflict-stricken Libya.
Others could come from outside, with the group trying to prevent US shale production from taking market share while Opec seeks to cut production in its efforts to support prices.
“Many challenges are ahead and we have to adapt,” said an OPEC delegate, who said the group’s handling of past crises has proven it is capable of responding.
Former Opec head of research Qabazard said the group may have a little more time to adjust before demand peaks. But he said the deadline for the Opec adaptation was approaching.
“I don’t think it will exceed 110 million barrels a day by the 2040s,” he said, adding that the fallout from the Covid-19 pandemic had changed consumption habits for good .
“It’s a permanent destruction of demand.”
To concern OPEC braces for era of declining demand amid Covid-19 pandemic