The Fuse

One Last Oil Boom?

by Nick Cunningham | June 18, 2021

Oil prices have climbed to their highest levels in more than two-and-a-half years, pushed higher by a combination of OPEC+ market coordination, a quick rebound in demand following widespread vaccinations, and oil supply restraint. The accelerating shift in the financial and policy world towards energy transition is also fueling speculation of a supply shortage in the years ahead.

The rally has resulted in a wave of predictions from oil analysts that another boom is around the corner. The only catch is that it could be the last.

Bust to boom

As a result of the pandemic, oil consumption declined by 8.6 million barrels per day (Mb/d) in 2020, a historic contraction. But demand is set to rebound by as much as 5.4 Mb/d this year, followed by an additional 3.1 Mb/d next year, according to new numbers from the International Energy Agency (IEA).

That puts oil demand back to pre-pandemic levels next year. To be sure, there is quite a bit of debate, to say the least, about whether demand has already peaked or is set to return to pre-pandemic levels. Suffice to say, a lot of demand is set to return, and the market is in the midst of tightening.

The IEA said that OPEC+ should “open the taps” in order to head off inordinate price increases.

Even as oil demand is going back to something like pre-pandemic “normal,” global financial markets are undergoing immense change.

Even as oil demand is going back to something like pre-pandemic “normal,” global financial markets are undergoing immense change, shifting capital to cleaner energy and forcing the oil industry to cut capex on new oil projects. The Dutch court case against Royal Dutch Shell, requiring emissions cuts, and the board shakeup at ExxonMobil are two high-profile cases. Both oil majors are going to need to rein in plans for growth.

There is also a financial hangover on the balance sheets of oil companies related to the 2020 bust, so there is less appetite to return to reckless spending. Upstream capex fell by a third last year, and won’t return to prior levels anytime soon, if ever.

This new dynamic comes as the IEA recently said that no new fossil fuel projects would be needed beyond those already under construction if the world is going to successfully chart a net-zero pathway to 2050. However, the world is definitively not on a net-zero pathway, which is where the oil boom predictions come in.

With demand on the rise and supply kept under restraint, a growing number of oil analysts are predicting an oil boom in some form. Already, prices are at their highest levels since early 2019. Goldman Sachs has even called for a long “super cycle” not just for oil, but for a range of commodities, typified by a long period of high prices due to inadequate supply and high demand.

Anything less than strong U.S. shale drilling will result in a big price spike that even OPEC+ cannot handle.

Others offer variations on this supply-driven price boom narrative. “In the event that the U.S. remains status quo and does not grow next year, global stocks could be nearly 400 million barrels lower, from entry to exit in 2022,” RBC Capital Markets wrote in a note. “Put another way, market balances only begin to reach a state of equilibrium if U.S. production grows by 1.2 million bpd next year. Anything short of that and balances will remain tight. And this comes after virtually all of OPEC+ spare capacity has returned to the market.” In other words, anything less than strong U.S. shale drilling will result in a big price spike that even OPEC+ cannot handle.

The last oil boom?

While there is no shortage of oil bull theories, other analysts are more nuanced. A new report from Boston Consulting Group lays out an interesting scenario – one last oil boom.

The firm sees a “high probability” that we are at the beginning stages of an oil boom, but that “it could be over quite quickly – within 18 months, or even less.” BCG’s new report goes on to add: “Perhaps more important, this oil boom could be the world’s last.”

The reasons for a coming oil boom are relatively straightforward, with demand rebounding but supply remaining mostly stuck. But there are also several reasons why the boom might be short and might be the last one the world sees, according to the BCG report.

Both oil supply and demand are more elastic than in the past, shaving off the harder edges of the cycle. Even if price increases do occur, the “peak prices are likely to be lower.” On the supply side, projects are “faster and smaller,” BCG said. And OPEC+ can bring back spare capacity as needed.

Oil demand destruction is not occurring fast enough to head off the unfolding market tightness, but higher prices will only spark even more investment in cleaner energy.

On the demand side, consumers respond more quickly than before. BCG notes that countries have pared back on consumer subsidies over the past decade, exposing them to high prices when the market goes up. “In India, where state controls have been removed in recent years, a combination of high taxes and the rise in oil prices since mid-2020 have blunted the growth in the demand for oil despite a rapidly expanding economy,” BCG said. Remote working will also blunt some returns to old ways.

More importantly, the energy transition is getting underway. Oil demand destruction is not occurring fast enough to head off the unfolding market tightness, but higher prices will only spark even more investment in cleaner energy. Electric vehicles and renewable energy are cheaper than conventional fossil fuels in many cases, and the equation only becomes more compelling over time. Put simply, consumers won’t stomach $100 oil in the same way they did a decade ago.

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