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Major Bank Sees Abysmal Demand Growth For Oil

Oil prices could bounce around between $50 and $70 through 2025, with both demand growth and supply growth slowing, according to a new report.

The oil market faces a steep supply surplus in the near-term due to the coronavirus and the prospect of demand destruction and economic deceleration. But the U.S. shale industry likely won’t rebound from its current slump, at least not to the explosive growth rates of recent years, keeping supply in check.

“Shale production economics in the US continue to point to a Brent price floor around $50/bbl or a WTI price floor of $45/bbl,” Bank of America Merrill Lynch wrote in its report. In other words, shale drillers cannot make money below $50 per barrel.

By the same token, shale will grow with WTI $65 per barrel or higher, the bank said.

But others have warned that this isn’t just a cyclical downturn – the shale industry’s blistering growth rate may be over. Schlumberger’s CEO Olivier Le Peuch sees U.S. shale growth slowing to between 600,000 and 700,000 bpd this year before falling to 200,000 bpd in 2021. Beyond that, it could plateau and not return to growth, Le Peuch told Reuters. “Shale production growth will go to a new normal...unless technology helps us crack the code,” he said.

Given that the industry is roughly $150 billion in hole over the past decade, the elusive promise of some future technology to “crack the code,” seems speculative. Shale’s best days may be in the past. Related: How Cobalt Could Fuel Hydrogen Adoption

The latest EIA data shows production set to decline in March in all major basins aside from the Permian, with the Anadarko basin in Oklahoma, for example, expected to lose 10,000 bpd. The Anadarko basin is expected to lose 16,000 bpd in February.

Meanwhile, pressure on global finance to back away from fossil fuels is likely to only grow. “[E]nvironmental risks will start to impact energy asset values in a meaningful way, further reducing investment and setting the stage for increased oil price uncertainty in the years ahead,” Bank of America said. Big banks have already announced a slew of new financing restrictions on oil sands, Arctic oil, and coal. A new campaign by environmentalists called Stop the Money Pipeline aims to ratchet up the pressure on banks, insurance companies, institutional investors and asset managers to shut off the financial spigot to oil and gas drillers. It’s still early days on this front.

For shale companies built on a mountain of debt, slower production and negative cash flow will push a lot of drillers under water and unable to avoid bankruptcy. Already, there have been more than 200 bankruptcies in the North American oil and gas sector since 2015, according to Haynes and Boone. More are inevitable.

So, slowing U.S. shale could keep global supply growth in check. But peak demand also looms. In its report, Bank of America Merrill Lynch says that demand will peak by 2030. By that year, roughly 35 percent of global auto sales will be electric, the bank says, up from 5 percent today. By 2050, EVs will capture virtually 100 percent of the market. “In other words, a switch to electric vehicles starting in the early 2020s would be strong enough to cause demand to peak within a decade,” Bank of America said. Related: 3 Energy Sectors Most Threatened By The Coronavirus

The bank said that global demand growth could slow from 1.35 million barrels per day (mb/d) in 2021 to just 0.59 mb/d in 2025.

Ultimately, then, that means that both supply growth and demand growth are slowing, which is a bad equation for a sector that needs to continually grow in order for a lot of the finances to make sense. The finances of shale E&Ps, as previously mentioned, are already a mess.

But OPEC, too, faces a conundrum. Bank of America assumes that the cartel continues to cede market share in order to prevent oil prices from falling. The group could cut deeper this year, and then be stuck at those production levels through the middle of the decade, the investment bank said.

By Nick Cunningham of Oilprice.com

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Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon.  More

Comments

  • Mamdouh Salameh - 27th Feb 2020 at 3:13am:
    This frenzy about global crude oil demand and prices in the aftermath of the coronavirus outbreak will soon be over.

    Until the outbreak is contained in China and around the world, all projections about its impact on global oil demand and China’s and prices will be no more than guesswork. However, one thing to guard against is exaggerated and outlandish projections.

    It is not as if China which is the main driver of global oil demand and growth is losing its appetite for oil. On the contrary, the reported extensive congestion at Chinese ports is a manifestation of oil shipments not being delivered because of the very strict measures China is implementing to contain the outbreak. However, once the outbreak is declared under control, global oil demand and prices will recoup all their recent losses and more. Moreover, China’s economy will most probably behave like someone who has been starved of food. Its appetite for crude oil will be as rapacious as ever.

    The fact that the global oil and gas industry managed to raise $617.4 bn in capital in 2019 speaks volumes about the indispensability and profitability of this industry. Oil and gas will continue to be the fulcrum of the global economy well into the future.

    Aside from the very strict measures being implemented in China and around the world to combat the outbreak, OPEC and the whole world can only wait and see.

    Neither new production cuts nor a deepening of existing ones by OPEC or by Saudi Arabia, UAE and Kuwait acting on their own will have any effect whatsoever on oil prices. It will only lead to a loss of market share and a weakening of OPEC’s influence in the market, something the International Energy Agency (IEA) and the Trump administration have been keen on.

    Even if global oil demand is slashed by 1.0 mbd because of the outbreak, it will still reach 101.43 mbd in 2020 compared with 101.23 mbd in 2019 as things stand currently.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • J Turner - 5th Mar 2020 at 6:43pm:
    Great comment! Maybe we need to stop interviewing people who stare at spreadsheets all day. Peak oil demand has been a mantra of the left for 40 years.
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