Oil demand peaked in 2019? Nonsense, says Fesharaki

It has been the big debate among oil market insiders and observers since the depths of the initial COVID-19 outbreak in March – is it possible that global demand for crude oil will turn out to have peaked in 2019?

It is a favourite theory of those wishing an early end to fossil fuel use – and some others – that the recovery from the coronavirus crisis will put the world on an accelerated path to cleaner energy such that consumption of oil may never return to last year’s level of about 100 million barrels a day.

“Nonsense,” oil market guru Fereidun Fesharaki, chairman of respected global energy consultancy Facts Global Energy, responded brusquely to The Australian Financial Review’s inquiry of his views.

“Stupidity has no limits.”

Under the International Energy Agency’s latest assessment, demand for oil is set to see a record drop this year, of 8.1 million barrels a day, but to regain much of that – 5.7 million bbl/d – next year. That would take demand to 97.4 million bbl/d, still 2.4 million bbl/d lower than before the crisis.

Although acknowledging the huge uncertainty over the outlook, IEA executive director Fatih Birol said last month that the peak of global oil demand was still years away – barring strong government policies being being put in place that would change its track.

Yet neither Shell nor BP, both of which have advised of multi-billion-dollar write-downs this quarter after slashing oil price assumptions, is ruling out the possibility that last year will turn out to be the peak as they fast-track their portfolios to suit a lower-carbon world.

“We are looking at a major demand destruction that we don’t even know will come back,” said Shell’s global chief executive, Ben van Beurden.

Italy’s ENI on Tuesday became the latest European major to advise of hefty write-downs as it cut its assumptions for long-term Brent oil prices by $US10 a barrel to $US60 a barrel.

“Having considered the prospect of the pandemic having an enduring impact on the global economy and the energy scenario, ENI has revised its view of market fundamentals to factor in certain emerging trends,” it said when flagging estimated impairments of €3.5 billion ($5.6 billion), plus or minus 20 per cent.

It did not comment on the demand outlook but said the market developments linked to COVID-19 “have made even more compelling the robustness of our strategic path and of our long-term choices”, pointing to its target of reducing emissions by 80 per cent by 2050.

Still, FGE’s Dr Fesharaki remains bullish on demand, while acknowledging that consumption this year has been badly affected, particularly for jet fuel, petrol and diesel.

“Oil demand has been hit badly, but there is still huge potential for growth,” he said in his latest “chairman’s corner”, sent to clients this week.

FGE’s base case – which importantly assumes a vaccine for COVID-19 is available in early 2021 – is that the world’s demand for oil returns to 2019 levels by mid-2022. Demand then would grow by 7 million-8 million bbl/d from 2023 to 2030, peaking by 2035 at about 113 million bbl/d.

A slow decline after that means that by 2050 demand would stand at 107 million bbl/d, still well above 2019 levels.

“The oil business may be a sunset industry but the end is not here yet!” wrote Dr Fesharaki, whose business depends on continuing demand for petroleum.

“There is still another decade in front of us when we will see growth.”

The FGE forecast also assumes that by the end of 2020, treatments are found to mitigate the impact of COVID-19, and that a vaccine is administered through 2021 to most countries. Although it takes into account a “second wave” of the virus, it assumes it will be containable.

“We need a lot of oil to feed a global demand of more than 100 million bbl/d for many years to come,” Dr Fesharaki said.

“This indeed may be the last hurrah of oil, but the story is not over yet,” he added, predicting a sizeable oil business remaining until the middle of the century, allowing low cost and efficient oil production projects to make good returns for years to come.

FGE is forecasting Brent oil prices, which slumped to less than $US20 a barrel in April and were about $US42.90 on Tuesday, will reach $US50 a barrel by the year-end. But it is warning prices face short-term headwinds and may fall back to $US35 a barrel by August before rising.

By mid-2022 it sees prices back to pre-COVID-19 levels at $US55-$US65 a barrel, which it describes as “a sustainable range for the next decade”.

Rival Wood Mackenzie is less bullish, reducing its long-term assumption for Brent crude last month to $US50 from $US60. Bernstein Research said that for those who did not believe in a demand recovery, $US25-$US30/bbl was the “new price floor”, but that its base case was for demand to recover in a year and prices to return above $US50 in the second half of 2021.

Extracted from AFR

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