Some notes about Energy

The collapse of oil prices which started at the end of 2014, and played out through 2015 and into 2016, took many by surprise. The International Energy Agency got it very wrong – as indeed it has repeatedly done in the past. The companies were no better, nor were the politicians who were so convinced that prices would go on upwards for ever.  They thought that even the more expensive renewables would all be in the money before 2020.

As the prices have come tumbling down, they have all struggled to keep up. Both the companies and the markets took the price falls to be temporary, and in the first half of 2015 they all expected a bounce-back to between $60 and $80 a barrel. The futures markets agreed. They then all revised down the estimates as 2015 ran onwards, but remained confident that there would be a return to high prices. Bankruptcy in the US and reducing on capital expenditure reinforced this confidence. It was all only a matter of time.

Despite the impacts of coronavirus and the associated lockdowns first causing further price falls, and then as demand recovered sharp price increases as supply lagged demand, these price spikes may prove temporary. The world may be heading back post-pandemic to 100 million barrels a day, with the US, Saudi Arabia and Russia all bouncing back.

The supply side looks pretty robust, whereas demand is anything but. The slowdown in China is real, and no amount of official Chinese statistics can disguise this. The weaker global demand for commodities may turn out to be much more normal than what went on up to the end of 2014, notwithstanding the exceptional pandemic experiences.  Further out, the demand side looks vulnerable too. Oil is used primarily in transport and petrochemicals. In both cases, gas is snapping at oil’s heels, and gradually electric cars and lorries, and new materials, will make a further dent in oil demand. Add in the digitalisation of manufacturing and services (robots, 3D printing, and AI) and the growth of electricity is likely to surprise on the upside. Oil plays little part in electricity generation. The digital revolution might continue the decline in world trade too, and production is re-shored, reducing the global transport demand further, encouraged too by the responses to the pandemic and the perceived vulnerability of supply chains.

A new normal will take a while to sink in. But when it does, the profound structural break with the past in oil markets is likely to reveal itself.

 

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