Morgan Stanley increases oil price forecast - Oct 20

[dan_s]

Martijn Rats, CFA at Morgan Stanley is a SUPER SMART energy sector analyst. Read his comments below with my take in blue.

The Oil Manual: Which Will Peak Earlier? Supply? Or Demand?

On current trends, global oil supply is likely to peak even earlier than demand. As prices search for the level at which demand erosion kicks in, we increase our 1Q22 Brent forecast to $95/bbl, but also lift our long-term forecast from $60 to $70/bbl. < IMO oil prices will only pull back if we get a global recession or another pandemic (Covid-22). If Brent goes over $95/bbl, WTI won't be far behind. A cold winter could push Brent much higher.

Peak oil, but which? The planet puts boundaries on the amount of carbon that can safely be emitted. Therefore, oil consumption needs to peak. However, this is such a well-telegraphed prospect that it has solicited its own counter-response already: low investment.
The question has now become: which will actually peak first? Supply? Or demand?

Energy demand has three powerful drivers: The world's population is expanding by 1 billion every 13-14 years, during which GDP per capita in real terms is set to increase by ~35% as well. The deeply uneven distribution of energy consumption around the world puts upward pressure on energy demand too. Despite efficiency efforts, energy consumption will still likely grow from ~600 EJ today to ~740 EJ by 2040, we estimate. < EIA's recent update on global energy demand predicts total energy demand will increase by 50% from 2020 to 2050, with oil demand increasing by 25% to over 120 million bpd and natural gas demand increasing by 30%. Coal is the only hydrocarbon primary energy source that will have a slight decline of less than 5% over the next 30 years.

Oil is set to lose market share, but demand will likely peak only around the turn of the decade: Oil accounts for ~31% of primary energy supply, but its share of energy supply growth is already lower at ~20%, and falling by ~0.5% per year. We assume this will continue, and then treat the electrification of transportation as a separate additional headwind. On these assumptions, oil demand peaks at ~105 mb/d by late/end of this decade. < I doubt this will happen. IMO EV sales will be much lower than expected because the soaring prices of the materials needed to make them (lithium, copper, nickel, graphite) will make EV's too expensive for most consumers. Plus the power grid cannot handle the increased electricity demand without a MAJOR and VERY EXPENSIVE upgrade. China and India cannot afford it.

Investment is already consistent with 'Net Zero', likely causing a peak in supply mid-decade: In the IEA's 'Net Zero' scenario, oil demand peaks much earlier and falls sharply to 72 mb/d 2030. Yet, even in that scenario, the IEA estimates that the oil industry needs to invest ~$365bn per year. Last year, capex fell to ~$350bn and has not rebounded in 2021, and probably won't in 2022 either. < If oil settles over $80/bbl, I think we will see a 15% to 25% increase in D&C spending, but that will not get U.S. oil production back to pre-pandemic levels (12.9 million bpd) in 2022 and maybe never since the Permian Basin is the only U.S. oil basin with significant upside.

If capex stays stable at current levels, global oil supply will likely roll over around 2024 and then decline sharply thereafter. < This will result in increased poverty caused by soaring inflation and less food supply. Global supply chains run on oil and NOTHING WILL CHANGE THAT IN JUST THREE YEARS.

Sustained high oil prices are likely needed to restore balance: Unless more investment is forthcoming, or major demand break-throughs are made, oil prices
will likely search for the level where some demand erosion kicks in. We raise our 1Q22 Brent forecast to $95/bbl and our long-term forecast from $60 to $70.

Where could we be wrong? Important risks to our forecast come from much faster demand decline than modelled here. Also, in the near term, the return of Iran, the response of shale, covid restrictions, and the state of the global economy are key factors. < On the flip side, I think it is going to take a lot more oil based fuels to rebuild the global supply chains and Israel could attack Iran with a major air strike to take out their uranium enrichment capability.
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I am using $70 WTI in all of my 2022 forecasts, but my guess is that OPEC+ will not be able to keep adding 400,000 bpd of supply thru Q2. Q3 is the high demand quarter for oil and this world may have NO SPARE CAPACITY within 9 months. If so, WTI will go over $100/bbl in 2H 2022.

If you would like to read the full Morgan Stanley report (21 pages) send me an email: dmsteffens@comcast.net

[SergioSays]

Well said Dan. It's sad that all the "experts" just assume we will hit this pie in the sky EV world, but that's where we are today.