The crude truth is oil’s not what it used to be
TO JUDGE by the energy industry’s most trusted forecasters, consumption of crude oil is blasting ahead with no peak in sight.
Usage will rise to a record 102.2 million barrels a day (mb/d) this year, the International Energy Agency (IEA) said on Friday. It will still be climbing at a brisk pace when it hits 105.7 mb/d at the end of the IEA’s current five-year forecast in 2028. Demand for oil will rise by about 16 quads, or roughly 7.5 mb/d, between 2021 and a peak in 2040, according to Exxon Mobil Corp.’s latest energy outlook.
That’s hard to square with the picture on the ground. Saudi Arabia said earlier this month that it would extend its 2 mb/d production cuts into September and consider deepening them further. China’s gasoline demand will peak this year, two years earlier than expected, thanks to the rapid uptake of electric vehicles, said an official with China National Petroleum Corp. The country’s overall oil demand may have peaked in the second quarter this year, dashing expectations of surging imports toward the end of 2023.
The disconnect makes far more sense if you consider just how slippery that term “oil” can be.
A century ago, it was simple. A refiner would buy barrels of viscous black liquid drilled from the ground — crude oil — and process it into fuel for engines and boilers. If you counted the barrels leaving refineries and made a few adjustments, you had a decent proxy for “oil demand.”
That’s changed. Though we still count “oil demand” in roughly the same way, biofuels, plus a suite of volatile chemicals from gas wells (known as natural gas liquids or NGLs), now constitute nearly a fifth of the feedstock for the world’s oil processors.
That shift explains the disconnect. To most of the world, “oil” is synonymous with “crude oil” — the sticky black liquid that’s subject to quotas set by the Organization of Petroleum Exporting Countries (OPEC), is priced off the Brent and West Texas Intermediate futures contracts, and has an API gravity of less than 45. To energy analysts, however, “oil” is synonymous with “refinery products” — and increasingly, the raw materials for that industry come not from oil fields, but from gas wells and farms.
OPEC’s bearish output cuts make a lot more sense when seen in that light. Output from refineries will be up about 1.7 million daily barrels this year, compared to its pre-pandemic peak in 2019. This sounds like evidence of a rising market. Almost all of the increase, however, comes from NGLs and biofuels. Supply of crude oil, the product that OPEC ministers target, will average about 200,000 barrels a day below 2019’s levels, according to the IEA’s data, and 600,000 daily barrels below 2018’s number, which was higher still.
Will output of crude oil ever regain its 2018 levels? That’s heavily dependent on both total demand for refined products, and output of biofuels and NGLs. The IEA now sees crude supply level with its 2018 peak next year, before it bounces back in 2025 to a level about 1.7 million barrels above the previous record. In 2028, it will hit 1.9 billion barrels above a decade earlier.
That margin could be eroded rapidly, though. India and Indonesia, home to two of the fastest-growing vehicle fleets, will now require respectively 20% and 50% of their road fuel to come from biofuels by 2025, a sharp increase from current rates of 10% and 35%. If supply matches the IEA’s accelerated scenario rather than the more pedestrian numbers in its oil market forecast, some 700,000 barrels of that 1.9 million barrel increase vanishes.
NGLs may also perform more strongly than expected. The chemicals are an inevitable by-product of natural gas production, so any increase in gas output is likely to add more NGLs into the market. Output soared over the past few decades as the US took efforts to reduce flaring and leaking of methane from its gas fields, and several major producers have promised to repeat the trick under the Global Methane Pledge announced in 2021. Abu Dhabi National Oil Co. in July announced plans to cut its methane emissions to zero by 2030, while Saudi Arabian Oil Co. said in March that it was in the process of adding 1 mb/d of NGL output.
Put all that together, and the path for crude oil to rise above previous peak levels may be far narrower than you’d think from hearing bullish reports of refinery output. Last September, I predicted a global recession driven by fast-rising interest rates would prevent crude oil demand ever rising above its pre-pandemic record. The recession hasn’t materialized, but crude demand is still waiting to recover. Should biofuels and NGLs continue to outperform, we may come to look back on 2018 as the year that 150 years of crude oil demand finally peaked.
BLOOMBERG OPINION
