Prospects for oil demand are strong, but spare capacity helps control prices

Global demand for oil and natural gas is expected to continue growing for the foreseeable future, although discussions of an impending oil price “supercycle” have so far proved premature, an expert panel agreed on Friday.

For the next five years, “We have a very constructive view of the demand for oil,” said ConocoPhillips chief economist Helen Currie during a webcast hosted by the Baker Institute for Public Policy. Rice University.

She said ConocoPhillips expects demand to return to 2019 levels “steadily by probably 2022”. However, the Houston independent is keeping an eye out for several bearish and bullish factors that could impact the recovery. Currie noted that it will take time for the US economy to recover from the unemployment, underemployment and exacerbated inequalities resulting from the pandemic.

Over the longer term, improving the energy efficiency of internal combustion engines will erode growth in demand from the transportation sector, and the growing penetration of electric vehicles (EVs) could eventually do the same, said Currie.

However, “there are a lot of questions to be raised” about the realism of some of the EV projections, “especially when you start digging… the mining sector supply chain and the minerals needed for all of those batteries. “

Another trend to note is the growing demand for hydrocarbons from the petrochemical sector, which “appears to be an area of ​​growth for a number of years now,” said Currie, “and a big part of that is the demand for plastics. Many consumers do not always realize to what extent petroleum products are present in their everyday life … “

While several bullish and bearish factors are at play, Currie said the base case scenario for ConocoPhillips is that demand for oil and gas will increase for the foreseeable future and be “a catalyst” for the energy transition.

Flooded with oil

Currie shared the virtual stage with Toril Bosoni, Head of the Petroleum Industry and Markets Division at the International Energy Agency (IEA).

The IEA’s latest monthly Oil Market Report (OMR) predicts a 5.5 million b / d rebound in global oil demand in 2021 after a contraction of 8.7 million b / d in 2020 However, the researchers indicated that the talk about the supercycle was premature, due to the huge reserve capacity overrun.

The report noted that “oil stocks still appear to be sufficient from historical levels despite a steady decline from a massive surplus that has accumulated during” the second quarter of 2020. US stocks, meanwhile, have increased for a third consecutive week for the period ended March 12. .

In addition, the Organization of the Petroleum Exporting Countries (OPEC) and Russia continue to have immense unused production capacity in the market. IEA researchers said OPEC’s spare capacity outside Iran stood at 7.7 million barrels per day in February. Unused capacity in countries not part of OPEC but which participated in the supply cuts orchestrated by the cartel “hold an additional 1.6 million b / d which could be put on the market in the short term”.

“The recovery in demand, although fragile in the short term, is expected to accelerate sharply, but there is plenty of spare capacity in OPEC to meet this demand,” Bosoni said on Friday.

On the supply side, Currie said, “We expect US production to increase over the next five years.” She explained that while capital discipline and the return of free cash flow to shareholders “are the order of the day”, oil prices “not only at the front of the curve but at the back of the curve. the curve “could help producers” to repair their balance sheet and perhaps to build production.

Regarding the unused production capacity highlighted by the IEA, Currie said, “We expect it to be brought back to market over time,” but the pace remains uncertain.

Iran is also “becoming a very big wildcard … in terms of the volumes it can put back on the market when sanctions are lifted,” Currie said. She also cited Venezuela and “a whole host of other countries” with potential for increased production such as Canada, Brazil and Guyana.

Currie and Bosoni were joined by Tudor, Colin Fenton of Pickering Holt & Co., president of commodities for the consulting practice, who expressed a similar view on supply and demand.

He said that even if the fuel demand for hydrocarbons were removed from the equation, it would only take 48 years for non-fuel (i.e. petrochemical) demand, growing at a compound annual growth rate. 3.5%, to match today’s total demand.

As for the shorter-term supply situation, he said the recent move by OPEC and its allies, aka OPEC-plus, to extend supply cuts until April reflected “excellent demand assessment “by the cartel,” Fenton said.

He noted that a definition of a supercycle is that demand puts pressure on the limits of available spare capacity. “You can’t simultaneously say … we’re in this supercycle, but then recognize that there are 9 million barrels per day of spare capacity.”

In other words, “the story of the supercycle may be true but it is premature”.

“Quick and painful” correction

New York Mercantile Exchange West Texas Intermediate crude oil futures for April delivery opened Monday at $ 61.55 / bbl after settling at $ 61.42 on Friday.

Louise Dickson, oil markets analyst for Rystad Energy, said on Monday that after last week’s “rapid and painful correction” in oil prices which had climbed to around $ 70 a barrel, prices were starting this week at a lower level. sustainable.

“There is still a certain residual pessimism in the market because Europe, instead of finally opening up … is seeing pockets of Covid-19 cases increasing, forcing many European countries to restore or extend blockages”, Dickson said. “Vaccination campaigns have not been as quick as the market had hoped and as a result this will have an effect on the recovery in demand for oil, which in turn pushes prices down, reducing some growth potential…

“If vaccination campaigns continue to face challenges, 2021 could see up to 1 million bpd of oil demand fail to recover this year, compared to a scenario of a soft recovery. “

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Felix J. Dixon