Is Oil Reaching Peak Demand? Will Energy Volatility Continue?

The International Energy Agency (IEA) reported in November of last year that they believe peak demand will occur sometime after 2040, with most of the increased demand during the period coming from China and India.  In BP's 2017 Energy Outlook, released earlier this year, the company notes that a broad consensus of experts are predicting peak demand to occur sometime between 2025 and 2040; but they also note that there is considerable uncertainty surrounding that forecast.

Why is demand uncertain?

Demand is sensitive to the price of oil; and the price of oil is in large part based on the volume of available, or excess, supply.  Supply is also increasingly influenced by global and regional politics. For example, following the market crash of 2008, oil producers reacted to rapidly increasing prices that by increasing drilling activity and production. By July 2014, the world was virtually awash in oil - storage tanks were full and supertankers were languishing in ports with no market for their cargos. By 2015, the market was vastly oversupplied causing prices to fall by some 70%. 

Then, in 2016 with oil trading around $30, an alliance of oil exporting countries including both OPEC and non-OPEC members – all faced with serious revenues shortfalls - reached agreement to reduce output by more than 3 million bpd.  This reduction in supply helped to push prices back to near $50/bbl, a price at which many US producers could once again resume drilling after being sidelined for more than a year.  Though US oil production declined by a half million barrels per day in 2016 (the first decline in 8 years) due to lower drilling activity, with current prices relatively stable in the high $40's and low $50's, US production is again expected to begin a gradual rise and could soon approach the levels of 2015…and likely higher, should prices hold through 2017.

As noted in last year's IEA report, demand for oil is rapidly changing. The OECD countries of the West had been the drivers of increased demand for much of the twentieth century. Today, global demand for petroleum products is increasingly dependent on economic growth in the Asia-Pacific region, with the economies of China and India being the largest drivers of increased demand for commodities of all stripes, but especially oil.  Should these economies grow beyond current forecasts, demand for oil could exceed then current supplies, forcing prices higher until additional reserves can be brought on line. Should growth fall short, the world could again find itself awash in oil and prices could again fall back to $30 or even lower.    

The basic tenants of economics stipulate that the balance of supply and demand will always seek equilibrium at a given market price - if supplies increase and demand is flat, prices will fall to a point that supplies will begin to dry up as more costly resources become uneconomic.  However, if demand increases and prices rise due to scarcity, supplies will increase as more costly resources can be increasingly exploited. Unfortunately, other forces such as politics, regulations, and regional conflict will always play a role in whether these resources will be made available; and these forces will be a continuing source of uncertainty in the future of energy prices.

Expect uncertainty and volatility

As the energy markets, and particularly the oil markets, continue to evolve – with new sources of production and emerging markets driving growth – oil prices will continue to be unpredictable.  The balance of supply and demand, exposed to politics, regulations and potential regional conflicts, can swing quickly and sharply. 

As reflected in the failed forecasts of the past and the uncertainty in the current models, no one can predict with any degree of accuracy where the markets will go in the future. All anyone exposed to the vagaries and volatilities of these markets can hope for is that they have the best risk management systems and analytics tools, such as Eka's ETRM software and Eka Analytics, to position themselves to maximize their upside when the markets move in their favor, and limit their downside when the markets move against them. 

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