{"id":1611,"date":"2015-02-24T15:54:28","date_gmt":"2015-02-24T21:54:28","guid":{"rendered":"https:\/\/allenergyconsulting.com\/blog\/?p=1611"},"modified":"2015-02-25T12:42:55","modified_gmt":"2015-02-25T18:42:55","slug":"oil-market-outlook-change-too-low-demand-expectations","status":"publish","type":"post","link":"https:\/\/allenergyconsulting.com\/blog\/2015\/02\/24\/oil-market-outlook-change-too-low-demand-expectations\/","title":{"rendered":"Oil Market Outlook Change \u2013 Too Low Demand Expectations"},"content":{"rendered":"

BP released their 2015 Energy Outlook.<\/a>\u00a0 As noted by their Chief Economist this is not to address prices or near term events.\u00a0 However, price, in the end, is the meat of a discussion for an energy outlook as price and outlook for supply and demand are intertwined.<\/p>\n

The outlook by itself is useful to gather facts and trends.\u00a0\u00a0 The real value for someone like me comes from the change in the outlook.\u00a0 In theory, the process of formulating these outlooks should not change.\u00a0 Therefore a change in outlooks signifies a change in market place expectations.\u00a0\u00a0 The best slide in reviewing the change to show the dramatic shift in expectations is slide 13 in the presentation.\u00a0\u00a0 The latest forecast for 2035 shows a very small call in OPEC <5 million barrels\/day see figure below.<\/p>\n

\"\"<\/a><\/p>\n

If we go back into time and look at the very same slide in 2011, we see the call for OPEC in 2030 (even less demand requirement given 20 year gap vs. 22 year gap in current forecast) amounts to over 10 million b\/d.\u00a0 This is a dramatic swing see figure below for 2011 BP Energy Outlook.<\/p>\n

\"\"<\/a><\/p>\n

IF one believed in the process and the forecast output, the shift between the two forecasts would dramatically drop the expectations of crude oil price.\u00a0\u00a0 As a longtime forecaster of the crude oil markets, the call on OPEC is key component on price forecast.\u00a0 This piece of the puzzle represented the additional swing from OPEC who, in theory, purposely holds spare capacity to sustain a reasonable market level.\u00a0 With the need of OPEC being diminished, the overall pressure for oil prices to move upwards is limited.<\/p>\n

Obviously, BP cannot state or present a price view given its role in the market place, but if their trade floor was made well aware of this trend and believed it, they would have made a good call over the last year.\u00a0 However, the long-term aspect of this trend does not bode well for BP as a company.\u00a0\u00a0 In fact, the overall energy sector would not benefit from this including renewable energy and refining industry.<\/p>\n

The demand side also shows some major shift in expectations.\u00a0 In 2011, the expectation for China oil growth was nearly 10 million b\/d more than the base year (2010).\u00a0 Now expectations have fallen to around 5 million b\/d from the base year (2013).\u00a0 The interesting outcome of this is whether BP flowed back the price response from the expectations of lower prices per the lower call in OPEC to the response of China demand.\u00a0\u00a0 To lose 5 million b\/d would require a much lower expectations of GDP outlook, in addition a very \u00a0inelastic response to the price of oil is needed to maintain such a drop in demand. \u00a0OECD demand decline is nearly the same – yet the price expectations from 2011 to 2015 must have dropped.<\/p>\n

From my experience, the demand piece is typically the flawed portion of the forecast after coming off a major supply shift.\u00a0\u00a0 Supply can be well understood in terms of cost of development and potential technology improvement curves.\u00a0 It is my belief that the demand outlook presented is too low.\u00a0\u00a0 The expectations of this come from both the price feedback of consumers and the fact that the demand side has included a significant portion of efficiency improvements over the past few years.<\/p>\n

Efficiency improvements do not lead to reduce consumption of a commodity without a continued price increase.\u00a0 This is supported by the Khazzoom-Brookes postulate and Jevons Paradox<\/a>.\u00a0 My caveat to the theory is to add the price component.\u00a0 Improving efficiency of a commodity leads to more use of that product without a corresponding price increase<\/em>.\u00a0\u00a0 I also expect this with electricity as we make up for the large efficiency improvement by having more devices and more appliance than we had a decade ago, even though, a single appliance may be 50% more efficient.<\/p>\n

I do not expect our human desires to have a car that is faster and bigger to be different by region or time.\u00a0\u00a0 Corporate Average Fleet Efficiency (CAFE)<\/a> improvements have and will result in near-term gasoline demand improvement in the US, but eventually with the falling prices and the improved efficiency improvement the auto manufacturer can produce an SUV with mass appeal and size that can go 0 to 60 in few seconds yet offer 25-40 mpg.\u00a0\u00a0 Auto manufacturers who ignore this trend will be left in the dust as was seen last time SUV sales outsold compact vehicles.\u00a0 This move to this larger and faster car will swallow the small vehicles leading to overall growth in oil demand while maintaining the CAFE standards.<\/p>\n

This mass appeal will also eventually migrate to other areas of the world.\u00a0 The ability to stop this rebound is the corresponding price.\u00a0 In the oil markets that seems to be muted as expectations of price is likely between $50 to $100\/bbl and not rising over $100\/bbl for the next decade or so.\u00a0 Power markets may thwart the rebound given the trend in transmission and distribution cost, but this will be highly dependent on the region. \u00a0Obviously adding a carbon tax would increase the cost curtailing the demand.<\/p>\n

Please consider All Energy Consulting for your energy consulting needs. \u00a0We offer a unique and fresh perspective on the energy markets to help you succeed<\/p>\n

Your Fundamental Supply \/ Demand Energy Analyst,<\/p>\n

David<\/p>\n

David K. Bellman
\nFounder\/Principal
\nAll Energy Consulting LLC- “Adding insights to the energy markets for your success.\u201d
\n614-356-0484
\ndkb@allenergyconsulting.com
\n<\/a>@AECDKB<\/p>\n

Sign Up to AEC Free Energy Market Insights Newsletter<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

BP released their 2015 Energy Outlook.\u00a0 As noted by their Chief Economist this is not to address prices or near term events.\u00a0 However, price, in the end, is the meat of a discussion for an energy outlook as price and outlook for supply and demand are intertwined. The outlook by itself is useful to gather […]<\/p>\n","protected":false},"author":1,"featured_media":28,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,26],"tags":[361,40,44,362,333],"class_list":["post-1611","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-oil-petroleum-products","tag-bp","tag-demand","tag-jevons-paradox","tag-oil-outlook","tag-opec"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1611","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=1611"}],"version-history":[{"count":15,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1611\/revisions"}],"predecessor-version":[{"id":1620,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1611\/revisions\/1620"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/28"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=1611"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=1611"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=1611"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}