International bank Goldman Sachs seems to have joined the peak oil demand proponents, as the bank has brought forward its forecast for peak oil demand in the transportation sector by one year to 2026. GS analysts even reiterate that automotive demand could even peak before 2026, if accelerating adoption of electric vehicles (EVs) increases. The bank predicts an overall “anemic” pace of global oil demand after 2025. Some optimism is still there, as they see continuing growth in jet fuel and petrochemicals.
Goldman Sachs assessments, next to BP’s market shock statements, will have a detrimental effect on long-term prices, as they belong to a strong market movers groups, which also includes the IEA and EIA. The statements of GS however stand contrary to others, such as OPEC, the latter expects still strong growth. The hydrocarbon sector is expected to face severe risks from the energy transition onslaught, activist investors and government strategies.
However, oil and gas markets insiders still are not in majority believing the overall negative picture, as strong demand growth for oil is expected from emerging giant India, while other upcoming markets in Africa or Latin America are not yet even booming. To rely on the impact of EVs, first of all to take over the hundreds of millions of conventional cars, or trucks, taking into account the ongoing shift from small vehicles to SUVs or even bigger, demand is still strong for a very long time.
Without an adequate EV power infrastructure in place, high costs and needed government subsidies, expectations should be tempered much more than EV reports are showing. The expected worldwide government drive, as stated in EU Green Deal or Biden’s Energy Strategy, are until now mainly paper reports, where analysts are looking at as facts, but reality is much more stubborn than forecasting. At the same time, worldwide economic growth is even expected to accelerate faster, as stated by the IMF, than a couple of months ago. Reality shows that at present renewables are still only taking a thin slice of overall oil and gas demand, which will continue even longer. A rule of the thumb is a clear indicator, it takes 5 million EVs to replace 1 million bpd of oil demand.
Goldman’s sometimes market moving approach, not always resulting in a desired outcome for banks, investors or 3rd parties, is not being followed by others. A growing amount of banks is concerned about the current and future markets based on two other issues. The first is that positivism in the market is still not based on facts on the ground. Morgan Stanley already has stated that it has changed its oil price range for 2021 from $70 per barrel to between $65-70 per barrel.
The latter not due to lack or growth of demand, but based on higher US shale production in future and possible return of additional Iranian barrels. Morgan Stanley reiterates that at present, overall storage volumes are going down, while US mobility is still up. The bank did not look yet at outside issues, such as 3rd wave of COVID in EU, Latin America or India. Remarkably, GS is very bullish, forecasting Brent to hit $80 per barrel in summer.
The GS long-term demand predictions are also not supported by short-midterm assessments made by Rystad Energy. The latter foresees a strong year-on-year oil demand growth of 6% in 2021. Total global oil demand is expected to increase from 89.6 million bpd in 2020 to 95.4 million bpd in 2021. For 2022 Rystad expects a demand of 99.4 million bpd. Road fuel demand in 2021 is expected to increase by 9% to 45.1 million bpd in 2021, in comparison to 41.3 million bpd in 2020. 2022 could even add another 2.4 million bpd. Other fuels are also looking good. Jet fuel will increase by 21% to 3.9 million bpd in 2021, and 5.4 million bpd in 2022, almost at normal levels.
A more worrying picture, not for oil prices or demand, but supply is the ongoing financial onslaught on US oil and gas producers. According to the “Oil Patch Bankruptcy Monitor” by Haynes and Boone, since 2015, there have been 262 producer bankruptcies. In the same period, 298 oilfield services and midstream companies have filed for bankruptcy, bringing the combined North American industry total to 560.
For 2021 the picture already is very bleak, as during Q1 2021 eight producers filed, the highest level since 2106, when 17 were filed. The aggregate debt for producers that filed in Q1 2021 is just over $1.8 billion, which is the second lowest Q1 total, after $1.6 billion in Q1 2019. Main territory for filings in Q1 2021 is Texas, showing 50% of the total. Still, some light is there when you want to keep optimistic. Haynes and Boone report that there were no producers with billion-dollar bankruptcies this quarter, which has not happened since Q3 2018.
The US picture can be put on other regions too. Financials are constraining recovery of hydrocarbon sector companies for longer. If no change in cash flows, or investment inflows, supply is more an issue before 2025/26 than demand. Demand is there, now we need to have upstream companies produce the barrels.
On another front, the market is watching with anticipation the ongoing JCPOA Iran discussion. A possible re-joining of Washington of the international Iranian nuclear agreement is still in doubt, but the options that the Biden Administration will take this step is still there. The market expects that, if the JCPOA again is a success, if the USA joins, Iran will reenter in full the market, putting additional barrels on the market. Analysts are worried about the possible negative repercussions for global oil supply volumes and oil prices.
At the present market, the stability is still weak, as it is still a storm-wracked ship trying to find a safe harbor. The vessel is being repaired at sea, however, lingering storms on the horizon are still on the mind of OPEC+ leaders and traders. Part of the stability at present is the fact that Iranian, Venezuelan, and Libyan oil is still out of the market. Arab producers, US shale and Russia, are however fearful of a re-emergence of Iran’s export potential at a time of a very weak market equilibrium.
This concern could however also be a idee-fix, as Iranian oil is already in the market. The IEA reported that “China never completely stopped its purchases (of Iranian oil)”. The OECD energy watchdog also said that Iran’s estimated oil sales to China in the fourth quarter of 2020 were at 360,000 barrels a day, up from an average of 150,000 barrels per day shipped in the first nine months of last year. Just before the JCPOA discussions again started, Iran increased exports to China to around 600,000 bpd. Major Asian clients in China, India and elsewhere, are happy to take Iranian or (Iranian origin) volumes based on their very low price settings and attractiveness.
The question to be answered here however is will Iran be able to sell much more oil than at present if sanctions are retracted. Iran’s main position for several clients is linked to low prices or large discounts. When there is no need for a discount, expectations are that Iranian oil prices will be market conform again.
The latter could be a major constraint for exponential export growth in future, as clients will look more at cost/barrel than origin. The competition will be harsher, putting a damper on overall potential for sure as long as demand is constraint, and OPEC+ spare production capacity is relatively high. To expect higher supply volumes while markets are weak is too optimistic. Iran is not going to decide oil markets in 2021, at least via oil volumes. Fundamentals are not promising, the only price increase at present is geopolitical! Ukraine-Russia, Turkey-East Med, China-Taiwan or Biden’s Middle East policy is price drivers, the rest is just marginal.