Ten years ago, the market was fretting, everyone was worried about "peak oil,” and now the focus is on peak demand. Instead of the world on a collision course of fighting over the last drop of oil, now it seems that we have turned the world upside down and now we are seeing predictions that oil demand will peak. The latest peak demand forecast comes from BP, which is predicting that the demand for oil will peak before 2040. How did we go from oil production Armageddon to a world where we will supposedly have more oil than we will know what to do with? Very simply, it is the power of the markets.
When crude oil prices rose, smart people in pursuit of profits built a better mousetrap. Not only did we see George Mitchell unlock the power of shale, we also saw a shift to alternatives. Yet, those with the lack of vision failed to realize that power and now I think we have gone to a level of overconfidence in writing the epitaph on global oil demand. I never believed in peak oil and I don’t believe in this peak demand either.
BP, as reported by Dow Jones, says that demand oil and other liquid fuels could continue to grow until around 2035, hitting 110.3 million barrels a day -- compared with 95 million barrels a day in 2015 -- before plateauing and peaking and falling off in the run-up to 2040. BP looks to alternatives to take oil market share predicting that they will account for 25% of daily needs. BP is assuming that government policies, technology and societal preferences will evolve in the future similar to how they have in recent years with a move towards electric cars and a move away from the internal combustion engine.
Yet, ExxonMobil, OPEC and the International Energy Agency disagree. In fact, BP is probably underestimating demand growth and overestimating the ability of alternative cars to replace the regular cars. Not only will costs play a big role, but the demand for cobalt and other rare earth minerals that will be needed to switch away from gasoline. The report must take into account where most of the demand growth will be for new cars and realize that many in the developing world will not be able to afford electric cars or have the money to invest in the infrastructure to support a world with electric cars.
Peak demand predictions may lead to underinvestment in oil, which will create a very tight market in the years ahead. So, in other words, we may be worrying about a very tight oil market in 20 years as well as a glut. BP is predicting that oil consumption will grow by only 0.14% a year between 2016 and 2040.
Yet, on the flip side, OPEC is warning that we are already creating a shortfall in our future. OPEC says that the oil industry needs to invest at least $10 trillion in fresh investments by 2040 to replace declining fields and ensure adequate supply to meet demand from the world's growing population. That warning came from the UAE Energy Minister Suhail bin Mohammed al-Mazrou. He reported that, "This year is going to be an interesting year where we are expecting to achieve the balance in the market between supply and demand and most importantly to see some significant investments come into the sector. We are talking about 22 years [until 2040] and we know it takes about five years from deciding to invest to finalize the project. So I think we as OPEC are keen to see this restoration in the market and to work with everyone."
The IEA says while oil demand growth may slow it will nor peak. They point to places like China where they expect to add the equivalent of U.S. power demand in the next 20 years. India will add the equivalent of European power demand.
Rising yields, that hit the highest level since 2008, shook up stocks and shook up oil. Still, we should see another drawdown in U.S. supply and that should provide some outside support. We are in shoulder season but as we get later in the cyclic we should see summer blend RBOB worries lend us some support.
Natural gas is in deep trouble unless it cold. Look to buy puts.