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On November 05, 2019, Organisation of Petroleum Exporting Countries (OPEC) reported World Oil Outlook (WOO), in which it was stated that global oil demand is estimated to surge at 110.6 million barrels/day (mb/day) by 2040 from 98.7 mb/day recorded in 2018, which reflects an increase of approximately 12 mb/day over the long-term.
However, it was also noticed that oil demand in The Organisation for Economic Co-operation and Development (OECD) countries is expected to start softening after 2020, driven by declining growth in OECD Americas. Oil demand in OECD Asia Oceania and OECD Europe started declining since 2017 and 2018, respectively. With lacklustre economic performance expected for the time being and with ongoing efficiency improvement of vehicle engines over the years to come, declining trend in oil consumption is expected to be the new normal.
Post peak oil demand in OECD countries in 2005, demand shifted to a declining trend until 2015, and then a combination of a plunge in oil prices and comparatively high GDP growth rates particularly in OECD Americas and OECD Europe supported demand growth. But post five years of growth, the outlook for OECD oil demand is returning back to a softening trend.
The trend was largely supported by OECD Oceania where oil demand was estimated to decline over the mid-term period. However, it should be taken into consideration that OECD Oceania is lowest average GDP region among all other regions and moreover it is region with the highest fuel economy for the existing car fleet, primarily in Japan and South Korea. Also, there is stringent regulation on commercial vehicles in these countries, which has led to softening demand for both gasoline (petrol) and diesel as well.
Coming back to the OECD European region, it experienced abruptly firm demand growth between 2015-2017, which is not estimated to continue further. The demand was largely muted in 2018 and it is estimated to have reduced slightly in 2019, together with further contraction in GDP growth. This trend is also supported by the sudden spurt in BEVs, PHEVs, hybrids and alternative fuel vehicles, which recorded strong demand growth and impacted gasoline and diesel demand with associated vehicle sales.
Also, the proportion of new cars with diesel engine in Europe plummeted substantially in 2018, driven by increased anxiety over the future of diesel as a fuel. Higher Nitrogen Oxide (NO) and particulate matter emission from burnt diesel, which is stringently regulated across Europe are the major apprehensions in this regard.
As per data released by European Automobile Manufacturersâ Association, diesel car sales slumped 18.4% in 2018 to 5.5 million new car registrations. It also witnessed a reduction of 17.9% in the first quarter of 2019 and the prevailing trend expected to continue with gasoline engines and alternative powertrains all set to bridge the gap created by reduction in demand for diesel engines.
Long-term Demand Outlook for Oil by Sectors â (2018-2040)
Majority of future oil demand growth is forecasted in the aviation industry and estimated to be the faster-growing sector, with oil demand rising on an average by 1.5% p.a. Aviation industry expected to add approximately 2.4 mb/day to future oil demand from 6.5 mb/day reported in 2018 to 8.9 mb/day in 2040. Also, some growth is projected to be witnessed in the marine sector and in rail and domestic waterways sectors. Demand in the marine sector was revised downward in this year's Outlook on the basis that more LNG-powered vessels are estimated to be operational from what was forecasted in past editions of the World Oil Outlook.
Source: World Oil Outlook, 2019.
Also, recent trends in the petrochemical sector provide a peek into the mid-term prospects before assessing the long-term outlook of oil. Medium-term trends in this sector would be largely be driven by firm demand for petrochemical products and the growing availability of comparatively cheap feedstock, especially in North America. The chances of robust petrochemical demand have strengthened because of a number of new projects being developed, and many among them are already at an advanced stage of construction. The global petrochemical industry has performed exceptionally well over the past couple of years, and this trend is likely to sustain over the mid-term with significant capacity expansion likely to take place, especially in China and in the United States.
The remaining two consuming sectors â residential/commercial/agriculture and electricity generation â show divergent trends. The first one is set to grow over the forecast period, driven by strong demand in non-OECD countries. In contrast, electricity generation is the only sector where demand is forecast to decline at the global level. This is a result of increasing competition from natural gas, as well as from renewables. The projected demand decline for electricity generation is close to 1 mb/day, reaching an outright demand level of 4 mb/day by 2040.
Oil Demand Outlook by Products- (2018-2040)
It is largely expected that the global gasoline demand would not only contract over the next decades but it is also expected to plunge post-2030 as well, led by overall improving fuel efficiency of vehicle engines and the increasing penetration of EVs, AFVs, which broadly offset demand growth resulting from the increase in the number of passenger vehicles.
For middle distillates, demand in this product group is dominated by diesel/Gasoil. In the long-term, demand for diesel/gasoline is expected to increase by close to 2 mb/day to reach 31 mb/day in 2040. This expectation is driven by a number of factors. On the positive side, growing requirements for transportation services in the non-OECD group of countries will lead to expanding fleets of trucks and buses, as well as primarily diesel-driven light-duty vehicles. Some demand growth is also projected in the rail and domestic navigation sectors. This is further supported by the industry, residential and agriculture sectors, while the marine sector is forecast to provide only a temporary boost to diesel demand.
However, comparatively weak growth in gasoil/diesel will be partially counterbalanced by firm growth in aviation turbine fuel and/or kerosene.
Other Takeaways from WOO 2019
It estimated that global primary energy demand is expected to increase at a decent rate of 25% between 2018 to 2040. Natural gas experiences higher demand surge in absolute terms and renewables experience the biggest growth in % terms.
It is estimated that oil will remain the fuel with major contribution in the energy mix throughout between 2018 to 2040. And Its demand expected to climb at 110.6 mb/day by 2040.
And, this would be driven by non-OECD oil demand which is expected to reach to 21.4 mb/day by 2040, against the demand contraction by 9.6 mb/day in OECD region.
Long-term demand is expected to come from petrochemicals, transportation and aviation industries.
Oil Price Performance â YoY
International Crude Oil benchmark, Brent Crude Oil plummeted approximately 15% in the past one year. However, it recovered substantially in between January 2019 to April 2019, but heightened slowdown and recession risks reversed the rally and drove it into a downtrend.
Meanwhile, the recent attack on the two major oil facilities in Saudi Arabia pushed prices up, but it was temporary as a broader trend is turning negative for the Oil industry in the wake of softening demand and stringent transportation regulations across the prevalent oil-consuming regions.
While writing, as on November 06, 2019 at 09:52 AM GMT, Brent Crude Oil Future Contract traded 0.81% lower at $62.47/bbl and touched an intraday high of $62.8/bbl and a low of $62.38/bbl.
In the year-over period, it has registered a 52-week high of $75.6/bbl and a 52-week low of $49.93/bbl.
Conclusion
In the year-over period, oil prices have been significantly volatile, oscillating between US$75/bbl and US$50/bbl. However, if demand growth remains steady and OPEC+ countries maintain discipline over production level, we believe prices to move between US$60-75/bbl range till 2020, respectively.
