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OPEC's optimistic outlook for oil and its implications

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2023-10-10

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Of course, OPEC would be bullish on the outlook for oil (and, to a lesser extent, gas) - they have no other way of surviving. If they weren't bullish about future demand, that would be big news.

Why this observation? Because OPEC has once again utilised one of its annual global outlook documents to bolster the prospects for the key commodity of its 13 member states, led by Saudi Arabia (and supported ex-officio by Russia).

In its 2023 outlook, OPEC raised its world oil demand forecasts for the medium and long term and claimed that $US14 trillion of investment is needed to meet this demand, even as renewable fuel use grows and more electric cars are sold to consumers who are tired of high petrol prices.

OPEC expects world oil demand to reach 116 million barrels a day (bpd) by 2045, around 6 million bpd higher than expected in last year's report, with growth led by China, India, other Asian nations, Africa, and the Middle East.

OPEC's optimism contrasts markedly with that of other forecasters, led by the International Energy Agency, who see demand peaking this decade.

IEA Executive Director Fatih Birol said last week that global coal, oil, and natural gas consumption may peak before 2030. The IEA advises industrialised countries and has cited the rapid growth in sales of EVs, especially in China, the US, and Europe as having the most immediate impact on demand.

S&P Global analysts pointed out that the bullish outlook should be seen as a marketing document: "The World Oil Outlook provides the data behind the producer group's energy market platform as world leaders prepare to gather at the core OPEC member, the UAE, in November for the next UN climate change conference, or COP28,” S&P said in a report on Monday.

The issue is existential for OPEC's 13 members, who rely on revenue from crude sales for the vast majority of their budgets. This reality puts them firmly in the crosshairs of climate activists and some policymakers alarmed at rising global temperatures, extreme weather events, and growing pollution.

"OPEC has sought to shift the dialogue at UN climate change conferences away from limiting or banning oil drilling to a focus on reducing and controlling emissions in the name of energy access and affordability.

"It is banking on the resilience of the global economy as its existential buffer against the energy transition, while the fiscal and industrial shocks of the coronavirus pandemic are still being felt, along with a reordering of oil and gas flows from the Russia-Ukraine war."

Road transportation (4.6 million b/d of growth), petrochemical production (4.3 million b/d), and aviation (4.1 million b/d) will drive the largest increases in incremental oil demand through 2045, the outlook stated, as oil retains the highest share in the global energy mix at 29.5% of all consumption, a slight dip from 31.2% in 2022.

OPEC ignores the rise in EV sales and use, the continuing push for green fuels for aviation and shipping - in fact, its bullishness suggests it believes the transition will not happen to any large degree.

The IEA and other groups say rising EV numbers in China will start cutting demand for oil products from the auto sector as early as late 2024.

OPEC's claims that oil should play a role in the energy transition ignore the fact that it is a prime reason that the transition has become urgent.

OPEC cited decisions by some governments and companies to slow retreats from fossil fuels - but those governments are populist, right-wing-dominated administrations (such as the UK) looking to pander to drivers and consumers because they are in all sorts of political trouble.

"Recent developments have led the OPEC team to reassess just what each energy can deliver, with a focus on pragmatic and realistic options and solutions," OPEC Secretary-General Haitham Al Ghais wrote in the foreword to the report.

"What is clear is that the world will continue to need more energy in the decades to come as populations expand, economies grow, and given the pressing need to bring modern energy services to those who continue to go without," OPEC Secretary-General Haitham al-Ghais said in the outlook, adding that oil and gas divestment campaigns and anti-drilling policies "are misguided and could lead to energy and economic chaos."

"Calls to stop investments in new oil projects are misguided and could lead to energy and economic chaos," he added, putting the required oil sector investment at $14 trillion out to 2045, up from $12.1 trillion estimated last year.

OPEC also raised its demand forecasts for the medium term to 2028, citing robust demand this year, ignoring the growing impact of economic headwinds such as interest rate hikes and weakening consumer incomes.

"Despite this outlook, oil demand proved to be resilient in 2023," the report said.

World demand in 2028 will reach 110.2 million bpd, OPEC said, up from the forecast of 102 million bpd in 2023. It predicted oil use in 2027 would reach 109 million bpd, up from 106.9 million bpd estimated in 2022.

By 2045, there will be 2.6 billion vehicles on the world's roads, a billion more than in 2022, OPEC forecasts. Over 72% of them will be powered by a combustion engine despite electric vehicles being the fastest-growing segment, the report claimed.

That leaves more than 27% of all vehicles as EVs (up from an 8% share of 2023 sales to June this year and a lower share of existing car numbers). The OPEC report lumps all vehicles together, ignoring the gathering transition to electric buses, small trucks, and other commercial vehicles.

No mention is made of whether oil supply would continue to be suppressed over the forecast period, like it is now. OPEC and its allies, known as OPEC+ (mostly Russia), continue to cut global supplies by 1.3 million barrels a day to underwrite prices.

The report sees OPEC's total share of the oil market rising to 40% in 2045 from 34% in 2022 as non-OPEC output starts declining from the early 2030s. To do so would require big output increases from the Saudis, Iran, Iraq, and smaller members (if they can raise the investment).

The real story, for the medium term at least, from the current production cap is that only the Saudis can afford such a large ‘investment’ in higher prices or a voluntary cut of a million barrels.

Russia can only contribute 300,000 barrels a day (and there is no way of checking to see if Russia is cutting output) without damaging its ability to finance the Ukraine war.

The biggest imponderable is how long can the US remain the globe's biggest producer (more than 12 million barrels a day). OPEC doesn't seem to address that but seems to be banking on US output fading up to 2040.

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