One Bank Crunches The Numbers On Oil Supply/Demand Dynamics, Reaches A Shocking Conclusion
With oil prices surging amid a broader global energy crisis, many are hoping that this particular price spike is truly transitory as incremental supply – whether from OPEC+ or shale – kicks in and resets the market lower.
But maybe not so fast: as Morgan Stanley’s chief commodity strategist Martijn Rats writes, on current trends, global oil supply is likely to peak even earlier than demand. And as prices search for the level at which demand erosion kicks in, he is increasing his Q1 2022 Brent forecast to $95/bbl, while also lifting his long-term forecast from $60 to $70/bbl.
As hinted by the bold text above, the note from the Morgan Stanley commodity strategist (available to pro zero hedge subs in the usual place) focuses on arguably the two key drivers in the oil market: peak demand and peak supply. As Rats explains, while tThe planet puts boundaries on the amount of carbon that can safely be emitted – and therefore, oil consumption needs to peak – this is such a well-telegraphed prospect that it has solicited its own counter-response already: low investment (especially in conjunction with ESG pressures to curb fossil fuels). The question has therefore become: which will actually peak first? Supply? Or demand?
According to MS, the second scenario would materialize if demand were to decline very sharply, say along the trajectory of the IEA’s ‘Net Zero by 2050’ study.
This assumes that oil demand falls by ~29% between 2019 and 2030, driven by technological improvements, a change in end-user behaviour and other factors (recent event have shown just how much of a pipe dream this is). The sum of all oil future oil demand in this scenario amounts to ~700-900 bn barrels, roughly half the estimate of proved oil reserves in the BP Statistical Review of World Energy of 1.7 trillion barrels.
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