Is There a Permanent Shift In Oil Demand?

July 28, 2020 07:33 AM
The market awaits the Federal Reserve decision and oil inventories
U.S. oil producers continue to struggle
Oil alternatives have drawbacks
Energy Report

Energy Report


The Phil Flynn Energy Report 

Twilight in the Desert Redux 

Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. It was a classic book by the late Matthew Simmons published in June 2005. And was the classic “peak oil” book predicting that Saudi Arabia was approaching — or already at — its peak oil output. It also theorized that the kingdom could not increase its oil production ever again in a significant way. That was proven to be wrong, but now there are predictions that we are facing a world of peak demand which may have some validity but is probably as incorrect as Matthew Simmons's theory was. Yet many, including members of the OPEC cartel, are as Reuters reports, "prepares for an age of dwindling oil demand.”

Reuters wrote that, "The Covid-19  pandemic drove down daily crude consumption by as much as a third earlier this year, at a time when the rise of electric vehicles and a shift to renewable energy sources were already prompting downward revisions in forecasts for long-term oil demand. It has prompted some officials in the Organization of the Petroleum Exporting Countries, oil's most powerful proponent since it was founded 60 years ago, to ask whether this year's dramatic demand destruction heralds a permanent shift and how best to manage supplies if the age of oil is drawing to a close. ‘People are waking up to a new reality and trying to work their heads around it all,’ an industry source close to OPEC told Reuters, adding the, ‘possibility exists in the minds of all the key players’ that consumption might never fully recover.”

I don't see it this way. While the demand growth for oil may not be what it might have been, the reality is that oil demand growth will continue to grow. Expectations that electric cars and a carbon-neutral world will crush peak demand for oil is flawed, as alternatives to oil still have significant drawbacks. Besides, as we have learned from oil's recent meteoric rise, negative pricing proves that if a commodity gets cheap enough, it will find some demand.

Today oil is steady as it awaits the Federal Reserve decision and oil inventories. Expectations that crude supply will rise may hold oil back. Products may see a decrease, but demand concerns are weighing on minds. The dollars' recent demise is also supportive and the fact that the December Gold futures contract hit 2,000 should make black gold hold its value.

Geopolitical risks are still in play. Overnight this headline hit, "Several fuel tankers have exploded in an industrial park in western Iran causing a major fire in the area, the semi-official ISNA News Agency reports." The attacks on Iranian infrastructure, ships, and nuclear plants are not just a coincidence. Stay tuned.

In the meantime, U.S. producers continue to struggle. The EIA reported that, "According to publicly filed financial statements, 40 U.S. oil producers collectively wrote down $48 billion worth of assets in the first quarter of 2020, the most significant quarterly adjustment since at least 2015. Low crude oil prices contributed to substantial declines in revenue and the value of these companies' proven reserves. Write-downs reflect negative adjustments in asset values; for example, when a producer acknowledges the value of an oil property has declined to less than the cost of developing it, and the company updates its estimate of the property's value.

The EIA analysis presented here uses published financial reports of 40 publicly traded U.S. oil companies, as compiled by Evaluate Energy. The observations don't necessarily represent the sector as a whole because the analysis doesn't include private companies that don't publish financial reports. In the first quarter of 2020, the 40 publicly traded companies included in this analysis collectively produced 6.1 million barrels per day of crude oil and other liquids in the United States or about 30% of all the U.S. liquids production for the quarter.

Proved reserves are estimates of oil that are recoverable under existing technological and economic conditions. As economic conditions change — especially the price of crude oil — the value of extracting these reserves changes. The price of Brent crude oil, a global benchmark, fell from $67.00 per barrel on the first trading day of the first quarter to $15.00 per barrel on April 1, the first day of the second quarter. A must-read.

Natural gas took a hit. While temperatures are still above normal, they are not way above average. This market needs temperatures way above normal.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.