In the mind of many a news consumer, oil is on its way out. So is coal. So is gas, although that one might stick around for a little longer. We are, after all, moving into a new era of clean energy, and while it will take us some time to get there, it’s our only option for a future. And fossil fuels have no place in that future.
The latest oil, gas, and coal price rally, therefore, must have come as a shock to that hypothetical news consumer. It turns out, this rally said, that news does not always reflect reality. Neither do oil and gas price forecasts. Remember when there was a gas glut, as recently as last year? Everyone said it would persist, keeping prices low. But it didn’t. The glut ended quite suddenly this year.
Predicting oil—or, apparently, gas—prices is a notoriously uncertain business. This, however, is not stopping hundreds if not thousands of people from doing it on a daily basis, with varying degrees of success. Right now, most forecasters seem to expect prices to continue rising because there are simply too many factors working to support them.
Over the longer term, predicting oil prices becomes even more challenging. Right now, it is especially challenging because few forecasters appear to have anticipated the current rally, and now a flurry of revisions are being made, according to a New York Times report. The revisions are not about average oil prices this year and next, however. They concern peak oil demand: one of the few necessary conditions for every net-zero scenario.
The dominant narrative is that the renewable energy rush will kill off oil demand growth in a few years, a decade at most. Yet this narrative never foresaw the current rally for some reason. It never factored in the possibility of a surge in the demand for coal, not just in the usual place—emerging economies—but in countries such as the United States, where coal consumption is on track to rise for the first time since 2014. The energy crunch this year disrupted a lot of narratives.
The short-term price outlook is quite fascinating. Crude oil inventories are being drawn down across the world, and OPEC+ is sticking to its original decision to add just 400,000 bpd to combined monthly output. It is, however, not doing even that because some of its members are struggling to fill their production quotas due to underinvestment that has been plaguing them for years.
Demand, meanwhile, is rising, with the energy crunch seen adding anywhere between 500,000 bpd and 750,000 bpd to the global daily average. This, combined with reports that U.S. crude oil inventories are some 6 percent below the five-year average for this time of the year, and that OECD inventories are 162 million barrels below the pre-COVID five-year average, has been very effective in keeping prices above $80 per barrel and spurring forecasts for three-digit prices.
This is what usually happens when prices are rising, but this time the rise was not exactly the usual one, part of the cycle of commodity prices. This time, prices were pushed up by a severe shortage of energy sources—fossil fuel energy sources. This fact could have spurred a much-needed discussion about governments’ approach to the renewable energy shift, but it hasn’t, not publicly. Yet it has spurred doubts that the shift would work exactly as governments plan it. And price forecasts reflect these doubts.
Some are already talking about $200 Brent and not only talking but betting on it. These may be crazy bets, but they do reflect a heightened uncertainty about the prospects of oil demand, much more heightened than usual. In reality, Brent rising to $200 a barrel could only happen in case of a severe reduction in production, and that is unlikely to happen as soon as next year, if ever.
But besides the crazy bets, there are also other signs that the demise of fossil fuels has been greatly exaggerated. Fund managers are returning to oil and gas stocks, Reuters reported this week. Despite the push into ESG investing over the past few years, funds are now eager to boost their exposure to oil and gas, thanks to this year’s stock price rally. Energy stocks have outperformed the S&P 500 substantially: they’ve booked a 53.8-percent increase over the past month, versus 20.2 percent for the broader index.
Now, the biggest question is about the longevity of the rally. No oil price rally lasts forever but, according to the NYT, this time there are two quite different explanations that would determine the longer-term outlook for oil price movements. One is for a short-term price boost from pandemic-related factors. The other is a disparity between emissions ambitions and the capabilities to fulfill these ambitions.
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Some would like to bet on the first explanation: that the current oil price rally is little more than a fossil fuel version of the dead cat bounce and fossil fuels are truly on their way out under the advance of wind, solar, and hydrogen. Yet, the second explanation rings truer in the context of investment decisions.
A recent UNEP report warned that oil and gas production plans by the 15 biggest producers are at great odds with the Paris Agreement emission targets. In other words, these 15 biggest producers continue to bet on oil and gas, despite emission ambitions, including their own stated net-zero targets. Oil may not reach $200 next year or ever, but it might end up being around and in wide use for longer than many might have hoped and believed.
By Irina Slav for Oilprice.com
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Of course you would have to pay a visit to the "Mexican Riviera" to understand why.
Maybe Austin, Texas is a nice place as a tourist destination.
Maybe..
The great danger is if politicians try to force the conversion away from oil and gas by restricting their supply, thus greatly increasing their cost. That could cause a repeat of the 2008 financial crisis, as the economy is forced to shrink due to having less energy to do the needed work.
With debt at record highs, a recession could pop the credit bubble, just like bad housing loans did in 2008.
Bankers saved the world by more debt creation in 2008, but they can not replace the transportation from oil with stimulus checks. But they will try, possible causing hyperinflation after a few years of sending people checks, trying to stop the economy from spiraling down from a combination of fuel shortages, high fuel cost, and falling demand for everything else among most consumers.
Key factors include Europe and China EV sales are over 20%. This trend is certainly going to impact consumption. It takes years to replace the existing vehicle stock, but with each passing month 20% of sales being electric makes it impossible for economic growth around the globe to replace the demand for oil being lost as vehicle sales shift to electric. The US lags in terms of EV as a percentage of auto sales, and as the second largest auto market with a preference for large vehicles that consume lots of gas it has a significant share of oil and gas consumption. But even in the US EV sales in 2021 have doubled from 2% to 4% YoY while sales of ICE vehicles are down significantly from the peak of years gone by. It was just a couple of years ago that the EU had sales numbers similar to the US. The trend is obvious in what it will mean for oil demand.
All major auto manufacturers are investing 10s of billions in transitioning their manufacturing. So it may be that oil has not quite peaked yet, but if the trend in EV sales is not turned on its head it’s just a matter of a couple of years at most.
To follow trends in advance, just look at where investment capital is flowing, and into longer is flowing to expand oil extraction. My guess is 2019 was the peak, if not then in the next couple of years.
Folks like to think these changes are policy driven, but the reality is they are mostly economic driven. Today, mostly the rich folks and rich nations have taken advantage of low cost renewables and now, but as prices continue to drop this is expanding to all parts of the world.
Try to buy a full size pickup or large SUV anywhere around the globe and you will find out that there is a huge wait and you will be paying FULL price. These cars will be around for decades, oil will remain the main power source for decades if not hundreds of years.