India is a ticking Covid time-bomb that went boom last week. The country is adding more than 300,000 new infections a day, a record unmatched anywhere else. Deaths per day are also at record highs and climbing. Its health care system is at breaking point in the wake of a brutal second wave of Covid cases. Oxygen shortages are pervasive, and hospitals are being forced to turn away Covid patients. Large parts of the country are now under new restrictions.
The latest surge of Covid-19 infections in India prompted a swift return of pandemic-related demand fears. Optimism of a sustained recovery in fuel demand has hit a snag. That said, the downside was limited by a fresh bullish catalyst from Libya. After months of relative stability, the OPEC nation declared a force majeure on exports from the port of Hariga. The unexpected disruption was due to a budget dispute between the country’s NOC and central bank. Output has fallen below the 1 mbpd threshold for the first time since October and could fall further if restrictions are extended to other facilities.
Lower crude production in Libya largely offset rising coronavirus cases in India. As a result, despite displaying fits of volatility throughout the week, Brent and WTI ended the period roughly 1% lower. Looking ahead, however, the prospect of rising OPEC+ supply is likely to weigh on sentiment. The latest bout of demand weakness comes just days before the producer group is due to begin reopening the oil taps. OPEC and its non-OPEC allies will meet later this week to rubber stamp their plans to start easing supply curbs in May. The looming wave of fresh OPEC+ supply coupled with renewed demand concerns has dented hopes for a meaningful summer price pounce.
Predicting the end of oil
At the start of last year, if anyone had suggested that the moment of peak oil had already passed, they would have been consigned to a medical institute. Then Covid happened. The crushing blow that the pandemic dealt to global oil demand has renewed the peak oil debate. And sure enough, recent months have seen a growing crescendo of claims that a peak in oil demand may be near, or even be past.
Leading from the front is BP. It first sounded the peak demand alarm back in September 2020 when it claimed that humanity’s thirst for oil may never again return to prior levels. That would make 2019 the high-water mark in oil history. This prediction from one of the world’s oil majors ruffled many feathers. Most, however, believe it will be many more years before peak oil demand will come. That being said, there is a general consensus that this milestone moment is approaching sooner than previously thought.
A case in point is Goldman Sachs. Despite a bullish stance on the short-term future of oil demand, the bank has a gloomier prediction for the longer-term future of the commodity. It recently brought forward its forecast for peak oil demand in the transportation sector by one year to 2026. This sentiment was replicated by Rystad Energy last week. The oil consultancy downgraded its long-term global oil demand estimates, so much so that the pinnacle is now predicted to come in 2026, two years earlier than previously expected.
Staying in Norway, oil and gas major Equinor expects global oil demand to peak by around 2027-2028, two to three years earlier than the company previously forecast. Meanwhile, consultant supremos McKinsey project a 2029 oil demand peak. And then there is the IEA. The agency still believes that oil demand will continue to expand up until 2026, thereafter it will plateau rather than peak. All in all, most research suggests peak oil demand has yet to pass. Nevertheless, the list of energy analysts who now foresee a peak in oil demand this coming decades keeps growing. There is, however, one notable and perhaps unsurprising contrarian. OPEC puts the peak in 2040, though this is universally viewed as wildly optimistic.
The key takeaway from these updated forecasts is that Covid-19 will have a lasting impact on oil demand, and rightly so. Pandemic-related changes in behaviour such as working from home are a shoo-in to persist after the emergency ends. Yet there is another factor that is also stoking the onset of peak demand, namely the ever-escalating worldwide transition toward clean energy. The world is at an inflection point on how it addresses climate change. And thankfully, governments appear more eager than ever to reduce carbon emissions and develop renewable alternatives.
This message was on full display last week at a virtual climate summit with 40 global leaders. President Joe Biden took the opportunity to unveil an ambitious new goal to reduce greenhouse gases. The US pledged to cut carbon emission by 50-52% below 2005 levels by the year 2030, essentially doubling their previous promise. Other governments are following suit in repositioning themselves more aggressively on the global climate agenda. The upshot is that demand for fossil fuels will never return to its pre-pandemic growth curve.
Predicting peak oil demand has long been a fool’s errand. But the unprecedented experience of a global pandemic, coupled with the climate emergency, has brought it closer to becoming a reality. Regardless of when peak oil happens, it is coming. Yet for all the doom and gloom, the world’s thirst for oil still has a long way to go before we hear its swan song.