Energy trends: Oil traders, supermajors disagree on supply and demand forecasts
The world’s oil supermajors and largest oil trading companies are not in agreement on the future trends in oil demand, a recent event has revealed. This, although normal, should serve as a signal to everyone watching the oil industry that any forecasts on supply and demand, regardless how bullish or bearish they are, need to be taken with a pinch of salt. Or two.
It wasn’t always this way. Once, oil demand was something certain to grow consistently, as there were no alternatives to fossil fuels. Now there are a growing number of these and some industry players are beginning to acknowledge their effect on oil’s fundamentals.
BP was the first to do so: in its latest Energy Outlook, the supermajor forecast that oil demand will peak some time in the next decade. The company noted in the report that “the continuing rapid growth of renewables is leading to the most diversified fuel mix ever seen,” adding that “Abundant and diversified energy supplies will make for a challenging marketplace.”
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Different companies are responding to this challenge in different ways. Shell, for instance, is pushing into renewables at breakneck speed. BHP Billiton, on the other hand, is exiting shale oil (under pressure from Elliot Management, but an exit is an exit) and looking for quick-return projects. Exxon is still an oil bull, forecasting that oil demand will continue to grow until 2040 driven by the transport sector and the chemicals industry.
But Exxon and other oil bulls may be underestimating the changes that the energy sector is already undergoing. That’s according to the chief executive of Gunvor. At the FT Commodities Global Summit in Switzerland, Torbjorn Tornqvist, said "I think that generally the oil industry has underestimated the challenges ahead. I think that electric vehicles are just the beginning, the advances create momentum which feeds that's momentum and accelerates it."
BHP’s Andrew Mackenzie is among those who are aware of these challenges, hence the focus on quick-return projects as “There have to be some questions on electrification as to what that will do to demand for oil from 2030-40 onwards.”
Yet not everyone is convinced that EVs and renewables are such a threat. Tornqvist himself noted that the challenge that EVs and renewable power generation represent would depend on regulatory factors rather than economic considerations. Trafigura’s chief executive, Jeremy Weir, is also not impressed by EV penetration projections, projecting that oil demand will continue to grow until at least 2035.
This uncertainty about the future of oil demand, S&P Platts’ Robert Perkins reports, is already affecting investment decisions, as evidenced by BHP’s new strategy in oil, and not all of these decisions will turn out to be the best ones. Of course, uncertainty is a constant companion of decision-makers in any industry, but in energy, it has been heightened significantly by the advent of renewables and electric vehicles.
There is a veritable race for more efficient, cheaper, greener solutions for every single segment of the energy. Given the sheer amount of innovation that is going on across the world with the ultimate aim to dethrone oil as the king of energy, chances are that the challenges for the oil and gas industry are indeed significant. The sooner everyone acknowledges them, the better.
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