Your author is a firm believer in the idea that sentiment- rather than fundamentals- drives market prices in the short term. That’s why our notes tend to obsess over sentiment measures like hedge fund positioning, options markets and time spreads instead of longer term supply and demand balances. As Lord Keynes once put it- “the market can stay irrational longer than you can stay solvent.”
You often get more bang for your buck as a trader if you can accurately gauge the temperature of the herd as opposed to having prescient calls related to fundamentals or geopolitics. Nevertheless, we still need to work to have as good an understanding as we can on long term oil market themes and were excited as always when BP recently released their comprehensive Energy Outlook for 2019 last week. After a not so quick read, the trend which most interested us was the discussion of renewable energy and electric vehicle market penetration in the context of what we view as short term bearish issues with US gasoline demand growth.
BP sees renewable energy supplying about 4% of total energy today and expects that figure to reach 15% by 2040. The company also argues that renewables will become the largest source of power generation by 2040. To paraphrase BP Chief Economist Spencer Dale, this would represent the fastest penetration of the world’s energy system of any fuel in history.
Just for fun, let’s assume that BP’s forecast is ultimately correct. At first glance, 4% of current energy supply and just 15% in the next twenty-one years may not seem like a terrible threat to anyone with natural length in oil. Unfortunately, BP’s report also sees global oil demand peaking near 108m bpd near 2030 (currently running 100.0m bpd) suggesting meager growth for the next decade. If renewables penetrate the market at a rate of about +0.5% per year through 2040 while global oil demand grows less than 0.5% per year what sort of scenarios does that create for oil price risk?
We’d argue one with increasingly small potential for 2008-style ‘scarcity fear’ rallies which are built on the perception of runaway demand growth and exacerbated by supply challenges. This certainly doesn’t mean that crude prices won’t top $75, but it will drastically reduce the likelihood of a +$100/bbl spike. In the U.S., gasoline consumption + exports have achieved growth of just 0.6% and 1.4% over the last two years and…