Is oil on its last hurrah or does it still have legs?

Oil prices have been on an upward trend since the beginning of this year with the benchmark West Texas Intermediate climbing more than 45% this year to the current price of about US$69.07 ($93.27) per barrel.

Analysts have also forecast that prices could climb further this year before stabilising in 2022 as the oil demand picture moves towards normalisation.

Indeed, there is every indication that oil demand will increase over the next couple of years as Asian economies recover and continue their march towards greater development.

However, many see this as the last gasp of a sector that is being pushed out by the growing push towards zero emissions with even the International Energy Agency, which was ostensibly set up to ensure the security of oil supplies, calling for the industry to stop investing in exploration and production.

Or is it?

The truth may be a little more complex and daunting than that, with research firm Goehring & Rozencwajg warning in its second quarter commentary that the foundation for an oil crisis is now firmly in place.

It noted that with the world re-opening and oil demand recovering, the beginning of 2022 will see oil demand reach new heights while non-OPEC oil supply has fallen by over 2 million barrels per day (MMbpd) and will continue falling through this decade.

“As early as Q4 of 2022, demand will approach world oil-pumping capability — a first in 160 years of oil history,” the research firm warned.

Oil going up, up and away?

Goehring & Rozencwajg added that the IEA’s call for a stop in oil and gas exploration and production will only make things worse as it would take away OPEC’s biggest competitors and give the oil cartel pricing power.

As an example, it noted that between 2003 and 2008, non-OPEC crude supply saw no growth, resulting in OPEC’s share of the global production rising from 38% to 43%.

This also led to crude oil prices rising four-fold in five years before the US shale oil boom added almost 10MMbpod to non-OPEC supply and forcing the cartel back on the defensive.

History is now poised to repeat itself with non-OPEC oil supply set to contract once again with Goehring & Rozencwajg noting that the COVID-19 retrenchment in oil demand now looks to be of far smaller magnitude than originally thought.

“Not only has China made significant new highs in oil consumption, but it now looks like the United States’ oil demand has made new highs as well,” it noted.

“The resiliency of global oil demand, even in the face of a global economic lockdown, supports our demand analysis and gives us confidence that oil demand will continue to show growth this decade.”

The research firm added that before the pandemic, its modelling suggested that just 2.5MMbpd and 3MMbpd of excess global supply was available.

With the ‘huge’ cutbacks in global upstream capital spending and US shale production declines, non-OPEC+ oil supply is now running over 2.5MMbpd below 2019 levels.

Should oil demand exceed the 2019 high of 101MMbpd, then demand could very well approach global pumping capability, especially given that that the buffer provided by US shales is now gone.

“As we progress through the first half of this decade, oil markets will become far more susceptible to frequent and pronounced price spikes.”

The low carbon mafia

All this doesn’t take into consideration the blows that both ExxonMobil and Shell took in recent months.

Activist investor Engine No. 1 managed to elected 3 new directors (out of 12) to Exxon’s board, bringing its mandate was to reduce the super-major’s carbon footprint by curtailing capital investments into its upstream oil and gas businesses closer to reality.

Meanwhile, a Dutch court ruled that Shell had cut its carbon dioxide emissions by 45% by 2030 to align with the Paris Climate Accord, leading the super-major to say that it is accelerating efforts to reduce emissions by investing billions of dollars in low-carbon energy, including electric vehicle charging, hydrogen, renewable and biofuels.

While the super-majors had already found it challenging to maintain their reserves and production over the last 20 years, the ESG pressure from activist shareholders is likely to make the going even harder.

Given that Goehring & Rozencwajg believes that they will have to double upstream spending to US$125bn per year just to maintain flat production and reserves, it points towards higher crude prices in the immediate future.

In the long-run, market pressures will inevitably bring about a shift towards more renewable energy solutions, but any large-scale green rollouts that reduce demand for oil inputs still look to be around a decade away (or more) at the present time.