Reasons for optimism about long-term oil demand

WWith all the talk about embracing renewables, tackling climate change and achieving net zero, some investors may be inclined to think that the long-term outlook for fossil fuel stocks and oil demand are negative.

The opposite could turn out to be true, and some of that evidence comes this year as oil prices and demand rise. The same is true for the energy sector, as it is the best performing group in the S&P 500. Up 34.18% since the start of the year, the VanEck Vectors Oil Services FNB (NYSEArca: OIH) take action.

As a reputable oil services exchange-traded fund, the OIH is correlated, often intimately, with oil prices and demand. It stands to reason, then, that some investors might be pensive about the fund in the context of the increasing adoption of renewable energies. Not so fast, according to some market watchers.

“The bear scenarios reflect very optimistic assumptions regarding the implementation and effectiveness of the carbon policy. Our base scenario is much closer to the business-as-usual scenarios for oil demand than to the bearish ones. We expect oil demand to drop from 99 mmbp / d in 2019 to 88 mmbp / d in 2050, an 11% drop or an annual drop of 0.4% ”, writes Morningstar analyst Preston Caldwell.

The takeaways are that, yes, the demand for oil will decline as more renewable energy projects are rolled out. However, the time frame for oil demand to decline is long, and in the meantime there are bound to be times when crude demand is robust, as is the case today. During these times, OIH could offer investors.

Another factor to consider is automobile demand. While transportation accounts for a significant percentage of the world’s petroleum consumption, the wider adoption of electric vehicles (EVs) – which will occur – is likely to be incremental.

“However, the switch to electric vehicles will not happen overnight, due to the long lifespan of the average vehicle. For passenger cars, we expect more demand than the bearish scenarios due to slow efficiency gains for the gasoline cars remaining on the road (including hybrids), ”Caldwell adds.

Some other forms of industrial and commercial transportation cannot be electrified, potentially indicating that as markets reconcile growing consumer demand for electric vehicles, there could still be a long-term case for the. OIH.

“Ships and planes are not eligible for electrification, so the most promising way to replace oil is to use green hydrogen and its various derivatives. However, we are skeptical that these alternatives will reach cost parity with oil even by 2050, ”concludes Morningstar’s Caldwell.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Felix J. Dixon