Could demand destruction keep crude ‘lower forever’?
Benchmark Brent crude floated above the US$50/barrel mark for a few days in early October, only to be dragged back into the high-$40s and languish at those levels, suggesting the market remains focused on an unrelenting supply glut and relatively anaemic demand growth.
US oil rig numbers continued to slide through October and tight oil production growth is finally slowing down, with 2016 now projected to record the first on-year contraction in output in five years. But the question is, will the expected 400,000 bpd drop in US production next year be enough in the face of up to 1 million bpd of extra supplies from Iran?
Equally crucially, as emerging economies round the world face fresh headwinds, and global GDP growth forecasts continue to be revised downward, how confident are we of the rise in oil demand next year?
The average of the latest forecasts by the International Energy Agency, the US Energy Information Administration, and OPEC is a 1.28 million bpd year-on-year rise in global oil consumption in 2016, compared with an estimated 1.53 million bpd growth this year.
China, which reported 6.9 per cent GDP growth in the third quarter, its slowest since the Global Financial Crisis of 2008, has had voracious appetite for crude this year, helped by the filling up of its newly built strategic storages.
Chinese crude imports over the first nine months of this year averaged 6.68 million bpd, up a strong 8.8 per cent on the corresponding period of 2014. But attention now seems to have turned to what Chinese demand will look like once the storages have been filled.
Even a fresh round of interest rate cuts by Beijing on October 23, days after the European Central Bank President Mario Draghi signalled the possibility of another large stimulus package in December for the Eurozone, failed to ignite a rally in oil futures.
The greenback’s volatility also fed into oil prices, with the US dollar index steadily sliding through the first half of the month and recovering in the second half, as expectations of a December Fed rate hike gained ground.
Though OPEC’s output in September dipped 60,000 bpd from a month ago to 31.2 million bpd, Saudi Arabia was the only member to rein in supply.
Nearly a year after the Saudi-led decision to defend market share rather than prices, OPEC looks set to stick to its current policy at its December 4 meeting.
Venezuela, which has been advocating coordinated action on oil production to support prices, advanced the idea of agreeing an “equilibrium” global oil price target of $88/barrel at a closely watched technical meeting between a number of OPEC and non-OPEC producers in Vienna October 21. But the meeting did not even come close to talking about any production cuts.
Russia is ready to compete for global market share, whether OPEC redistributes any extra crude output from Iran within the organization’s current 30 million bpd ceiling or raises total output, energy minister Alexander Novak told the country’s state television.
As the oil market lumbers slowly and painfully toward that unknown equilibrium price at an unpredictable point in the future, companies continue taking billions of dollars of capex off the table, and slashing costs to the point that would enable them to break even around $60/barrel.
Even as upstream producers adjust to oil’s new economics, a bigger game-changer could be their growing pivot toward natural gas, which was evident at a climate change forum in Paris mid-October. The CEOs of 10 major producers, which account for nearly a fifth of the world’s oil and gas output, committed to boosting the share of gas in the energy mix under an “Oil and Gas Climate Initiative.”
The initiative includes efforts by the companies to reduce greenhouse gas emissions through efficiency in their own operations and at the end-user level of their products, development of renewables, technological solutions to cut emissions, and carbon capture and storage schemes.
Amin Nasser, the CEO of Saudi Aramco, which is one of the parties to the OGCI, said the company planned to invest $100 billion in gas over the next 10 years, with a view to phasing out direct burning of oil for power generation, which can at times reach 900,000 bpd.
Looking farther out, UK-based think tank Carbon Tracker Initiative is predicting demand destruction of all three major fossil fuels -- oil, gas and coal -- over the coming decades. It asserts that the typical industry scenarios calling for 30-50 per cent growth in fossil fuel demand to 2040 do not take into account the push to decarbonization amid national emissions reduction plans, advances in energy efficiency and clean technology, the global decoupling of energy demand from economic growth, rapidly falling costs of energy storage, and a likely exponential growth in electric vehicles, which could rob oil of its largest market, the transport sector.
Could such a tectonic shift mean oil prices not just lower for longer but lower forever?
Vandana Hari is editorial director, Asia, at Platts