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Page added on October 11, 2017

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Oil: We still need (plenty) more supply


Analysts at HSBC suggest that despite a likely peak in LDV demand in 2025-30, the peak in total oil demand still looks much further off  and they see a looming shortage of supply as a more pressing issue, pointing to upside in prices from current levels.

Key Quotes

“The rate of climate policy progress and technological advances in alternative transport means the outlook for global oil demand has become subject to an unusually high level of uncertainty.”

“Our model indicates that on most scenarios, a combination of higher Electric Vehicle (EV) sales and improving fuel efficiency in the internal combustion engine (ICE) fleet leads to a peak in light duty vehicle (LDV) demand for oil in the period 2025-30, albeit with limited demand erosion before 2030 or so due to the scale of the existing LDV fleet.”

“Total oil demand has the potential to continue growing for much longer, driven by more durable growth in demand for heavy goods freight, aviation and petrochemicals. As a result, scenarios point to a most likely peak for total oil demand in the region 2030-35. For context, at 40% EV sales penetration of the LDV fleet by 2040, we see 2040 LDV demand ~3mbd below 2016 levels, but total oil demand 10mbd above it.”

“The model also highlights that the sensitivity of demand to changes in efficiency of the ICE fleet is at least as important as changes in rates of EV penetration.”

“While our analysis points to an inevitable peak in global oil demand, we think the availability of adequate supply will become an issue a long way before this – possibly around the end of this decade. On our estimates even a highly progressive scenario from a climate perspective (i.e. consistent with global 2°C ambitions) still leaves a substantial supply gap to be filled, given the inevitable effects of long term decline rates and the lack of major new growth projects on conventional supply.”

“Short-cycle production such as US tight oil can meet some of this shortfall, but the last few months’ slowdown in US activity is clear evidence that the recent momentum of US growth won’t be sustained at prices around current levels. We think higher prices are needed to generate an adequate scale of short-cycle supply response (in the US and elsewhere), and to have a meaningful dampening effect on global demand growth. So almost whatever the uptake of EVs and other alternatives, the dynamics of the oil market point to upside in crude prices in the next few years. We continue to assume an average Brent price of USD70/b from 2019 onwards.”

FX Street

11 Comments on "Oil: We still need (plenty) more supply"

  1. rockman on Wed, 11th Oct 2017 2:01 pm 

    Again the same question chasing its own tail: demand is not what consumers WANT to buy but a dynamic of what they can AFFORD to buy but limited by the amount producers are able to deliver. But even that is not a simple projection: the amount of oil not only produced but also NEW production that is brought on is subject to the price. It should be obvious that the surge in US oil production was primarily due to the huge increase in the price of oil. If that isn’t obvious then you’re hopelessly lost and won’t understand this post. LOL.

    So any model of future demand has to not only include changes in consumption patterns but depletion offset by new drilling all of which will be, to a large degree, a function of future prices. And future prices will, to a large degree, be a function of future global economic vitality. So while higher oil prices might drive the demand for EV’s if the global economy is so weak it will continue driving those old ICE’s instead of buying new EV’s even if their prices come down to comparable ICE prices. But even if there is a huge increase in EV’s on the road will that huge demand for electricity be filled by fossil fuels or renewables? One more significant ASSUMPTION in any model.

    IOW the ASSUMPTION that EV’s will capture 40% of the market has to be based upon some estimate of the future cost of hydrocarbon sourced fuel. The current strength of ICE sales is a result of lower gasoline/diesel prices and proves that point.

    None of which is to say trying to predict the future isn’t a valid goal. But there are a number of highly variable assumptions (future decline of producing reserves, future development of new oil reserves, future oil prices, future economic condition of the global economy) that must be made. And choosing the extreme (yet reasonable) end points of those assumptions will lead to very different out comes. Outcomes that will be determined by the ASSUMPTIONS one puts into the model. And since there’s no way to prove any one ASSUMPTION is valid (why it’s an ASSUMPTION and not a FACT) the resultant models will be dominated by the bias of the generator.

    IOW picking the future one expects/hopes to see develop will determine what any one model projects for the future. IOW doomer models, cornucopian models, environmentalists models, pro fossil fuel models, pro EV models, etc.

    There will be individual solutions that will please everyone. What more could we ask for? LOL.

  2. fmr-paultard on Wed, 11th Oct 2017 2:11 pm 

    thank you supertard.
    if i may hijack your analysis, i may say none of the scenario you mentioned has room for supremacist extremist nazi tard preachers.
    it is the old ASSumption; that lower energy regimes necessitate the assumption of powa by SENTP. In reality, one can figures the impact of the bumpski which would change everything.

  3. Anonymouse1 on Wed, 11th Oct 2017 3:33 pm 

    No narrativeman, ‘consumers’ will consume only the products that corporate elite deem it is worth their time and effort to bother producing. Once since decision has been made, marketing teams and mass advertising, are then deployed to inform the consumers, under what conditions such products will be delivered, how they will be consumed, and as a corollary, to like it. Whether ‘consumers’ actually want or need w/e is being peddled, whether it is environmentally ruinous or not, such considerations seldom enter into corporate calculus. Nor does ‘demand’ as demand can be manufactured as readily as any other product.

    For you, ‘consumer demand’ has almost religious connotations. It is an article of faith, not one of reason or analysis.

    Put a little differently, the notion you love to peddle that consumers dictate corporate behavior, and decision making, is ideology, or, if you prefer, religion, not fact, narrativeman.

  4. Boat on Wed, 11th Oct 2017 5:53 pm 

    Again the same question chasing its own tail: demand is not what consumers WANT to buy but a dynamic of what they can AFFORD to buy but limited by the amount producers are able to deliver

    Apple has 300 billion in cash. They can afford all the oil they want. I buy all the oil I want without 300 billion.

    The futures contracts prices are driven by many factors that are simply fear/supply/events.
    Weather, war/rumor of war, pollution regulation, economies of different countries, OPEC cuts, etc. Actual supply at places like Cushing creates makes a difference in oil prices.

  5. rockman on Wed, 11th Oct 2017 11:31 pm 

    Boat – “Apple has 300 billion in cash. They can afford all the oil they want. I buy all the oil I want without 300 billion.” FYI you and Apple buy a completely insignificant amount of petroleum products. Thus y’all are not relevant to this discussion.

  6. Cloggie on Thu, 12th Oct 2017 8:43 am 

    Delft Technical University from the Netherlands just won the 2017 edition of the World Solar Challenge in Australia for solar race cars:

    They won for the 7th time.

    Eindhoven University (“solar family cars”) was also #1 until yesterday, but suffered technical problems, just like all their major competitors did (Bochum-Germany, Iowa-US and Australia).

    They are still #1, but will need to make it to Adelaide tomorrow to call themselves winner (yet again).

    The third Dutch university Twente ended 5# in the racing segment:

  7. Cloggie on Thu, 12th Oct 2017 12:28 pm 

    Interesting MIT potential storage breakthrough:

    Reducing per kWh storage cost to merely “a fist full of dollars”.

  8. rockman on Thu, 12th Oct 2017 1:01 pm 

    Cloggie – “The sulfur-oxygen-salt battery under development currently has a useful life of 1500 hours — far less than the 20-year lifespan needed to attract commercial interest in the technology.” So all the boys at MIT need to do is increase the lifecycle on the order of about 100X.

    But since you understand the math far better then I can you figure out the comparable cost of the E.on commercial storage they are building in west Texas that will be fed by two wind farms it owns.

  9. Anonymous on Thu, 12th Oct 2017 1:09 pm 

    US crude oil hit 2 MM bpd exports. Obviously, we are exporting light and importing heavy. And exporting from locations with more (Gulf) and importing with less (Atlantic), after all we are a huge country with different transport issues.

    Still, that is a metric shitload of export. I mean that gets NOTICED, when total waterborne crude is less than 40 MM bpd.

    People are learning to spec Bakken or EF crude. Just one more flavor of ice cream…

  10. Cloggie on Thu, 12th Oct 2017 5:04 pm 

    @Rockman, I trust you mean this project:

    can you figure out the comparable cost of the E.on commercial storage they are building in west Texas that will be fed by two wind farms it owns.

    This should give you an indication:

    189 euro/kWh

  11. Cloggie on Thu, 12th Oct 2017 5:11 pm 

    Oh wait, they do not just mention the power (10 MW) but also the size of the storage, 5 MWh:

    5 MWh * 189 euro/kWh = 945,000 euro = 1,115,100 $

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