Morgan Stanley expects that in a 4% inflation scenario, Brent crude oil incentive prices will rise to $80-100 per barrel.
International benchmark Brent crude oil has continued to plummet this year, approaching the $70 mark. With weak global economic growth and the ongoing decarbonization movement, when will the oil market see a reversal?
On Wednesday, local time, Natasha Kaneva, Chief Commodity Strategist at JPMorgan, released a research report stating that global oil demand will not peak until eight years later. She predicts that global oil demand will reach 106.9 million barrels per day in 2030, an increase of 7.1 million barrels per day compared to 2022.
At the same time, the supply-demand gap will exceed 4 million barrels per day. To bridge this gap, the incentivized price for Brent crude oil could rise as high as $100 per barrel.
Global oil demand may peak in 2030
Unlike other long-term bears, Kaneva believes that oil demand will not peak until 2030, driven by petrochemical products and air travel demand.
She wrote in the report:
Paradigm shifts are slow at first, and then they happen suddenly. In 2022, the efficiency policy implemented more than a decade ago first manifested in the data. The total number of trips in the United States last year was higher than in 2021, with similar mileage growth compared to 2019, but gasoline consumption decreased by 6%. This is despite both passengers and cars reaching historically high weights.
The significant improvement in efficiency has had a huge impact on overall demand: the actual efficiency of new cars sold in the United States has increased from 19.3 miles per gallon in 2004 to 25.4 miles per gallon in 2021. Car manufacturers predict further improvement in new car efficiency in 2022.
Electrification is also putting pressure on consumption: in May 2023, pure electric and hybrid vehicles accounted for 15.4% of total vehicle sales in the United States, more than triple the 5% in 2020. Importantly, we estimate that a certain type of electric vehicle currently accounts for 4% of the total passenger vehicle sales in the United States, which is approximately 250 million units.
The structural decline in U.S. gasoline consumption will have global implications. This is because driving is very common in the United States, and U.S. gasoline consumption is higher than any other country, accounting for 34% of global gasoline consumption and 9% of global oil demand.
However, we have not seen oil demand peak. Even in the case of decarbonization, the total oil consumption throughout the forecast period may continue to grow, driven by industrialization and improved living standards in emerging economies.
We expect global oil demand to reach 106.9 million barrels per day (bpd) by 2030, an increase of 7.1 million bpd compared to the level in 2022. However, this figure is 600,000 bpd lower than our estimate a year ago, as lower-than-expected oil demand in 2023-2024 has suppressed the trend growth. The passage of the "Inflation Reduction Act" and two new environmental proposals in the United States, as well as Europe adopting stricter environmental regulations, have also led to downward revisions in the forecast.
Gasoline has long been the backbone of oil demand and is the only product that JPMorgan predicts will decline in demand over the next decade, while diesel consumption is expected to stabilize over the next eight years.
Importantly, JPMorgan believes that the growth in oil demand will increasingly be driven by petrochemical products and air travel. The demand growth for petrochemical products alone will reach 2.4 million bpd, accounting for 33% of the total demand growth.
Supply to rise and then fall, reaching 103 million bpd by 2030
On the supply side, JPMorgan's baseline assumption is that global oil supply will increase from 99.1 million bpd in 2022 to 104.5 million bpd by 2027, and then decline to 102.6 million bpd by 2030.
JPMorgan states that non-OPEC+ countries in the Americas will dominate the net supply increase over the next eight years, with a net increase of 2.9 million bpd, accounting for 83% of the total increment.
U.S. oil producers are leading the surge in oil prices, with only the growth in U.S. supply reaching 3.5 million bpd among non-OPEC+ countries. Canada, Guyana, Brazil, and Argentina together may contribute an additional 2.2 million bpd. OPEC+ production is expected to collectively decrease by 800,000 bpd, with underinvested African member countries leading the decline in production while core member countries' production remains relatively stable.
Increased exports and domestic production will push Iran's oil output to 3 million bpd by June 2023, and we expect Iran to increase production and maintain it at 3.3 million bpd during our forecast period. We maintain our view on Russia, which will be able to sustain its oil production at the level of 10.8 million bpd before the outbreak of the Russia-Ukraine conflict, but it will be difficult to recover to the peak level of 11.3 million bpd before the COVID-19 pandemic.
Supply-demand gap of over 4 million bpd, oil prices may soar to $100
According to JPMorgan's forecast, the global oil supply-demand gap will exceed 4 million barrels per day by 2030.
JPMorgan has identified 250 projects in the global oil industry, with a total capacity of 6.9 million barrels per day. In theory, this can meet the supply gap, but obviously, not all projects can proceed smoothly, only those that meet certain thresholds can.
Therefore, JPMorgan has set the internal rate of return (IRR), which is the expected return on investment, at 20% and 25% respectively, and the long-term inflation outlook at 2% and 4% respectively.
According to JPMorgan's estimation, assuming an inflation rate of 2% and an IRR of 20%, the Brent crude incentive price floor is approximately $63 per barrel. Under the assumption of unchanged inflation rate and an increased IRR of 25%, the incentive price will rise to $78 per barrel.
In the scenario of 4% inflation, the Brent crude incentive price will rise to $80-100 per barrel. In response to this, financial blog Zerohedge believes that this assumption is feasible, as current investment weakness may lead to a significant increase in oil prices.
JPMorgan concludes that compared to the early 2010s, the world today is able to produce more oil with less investment. However, although the current annual investment of approximately $500 billion in upstream oil and gas supply is "healthy" and mandatory, capital expenditure needs to be maintained at the current level to meet the demand by 2030.
