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Peal oil (demand)?

Are we at peak demand for oil?

Global demand for oil in 2019 was around 100 million barrels per day (mbpd). The COVID-19 pandemic has seen 9mpbd or 9% of demand disappear. This is unprecedented in the history of oil demand and explains why oil stockpiles are overflowing. Predictably, the oil price collapsed from over US$60/bbl to less than US$20/bbl and has recently bounced to US$40/bbl. However, it is not just oil that has been bashed, thermal coal and natural gas (in the form of LNG) prices have also fallen to multi-year lows.

Fossil fuel prices

Oil has fallen from >US$60/bbl to US$40/bbl. Thermal coal has fallen from >US$100/t to US$55/t and LNG has fallen from >US$10/t to US$2/t.

It is important to note that before the Coronavirus pandemic hit, there were already problems for fossil fuels. These include:

  1. Climate change and the need to reduce carbon emissions (over the medium to long term);

  2. Air pollution and the need to reduce carbon emissions (immediately);

  3. The increasing competitiveness of renewable electricity and battery storage against coal and gas-fired generation;

  4. The increasing threat of electric vehicles replacing the combustion engine; and

  5. The increasing efficiency of existing combustion engines.

We note demand for oil in the US has not increased since 2005, despite annual growth in GDP and the population. (Source:US EIA)

And post COVID-19 we would expect that some of that 9mbpd in demand destruction could be permanent. This is because consumers have learnt new behaviours (working from home, use of video conferencing) that could permanently reduce city transits and international travel.

Further, BNP Paribas (a European Investment Bank) estimate that today a renewable electricity network and electric powered vehicle are so much more efficient than petrol powered engines that oil needs to be around US$10-20/bbl to be competitive (and that is before we take into account carbon emissions). The only reason we have not converted to electric vehicles as yet is due to the huge amount of sunk capital invested into oil and petrol networks and petrol cars. It will take time to replace these assets with new renewable energy power plants and plants to build electric vehicles but the electricity network is already there. Most experts estimate the transition to electric vehicles will accelerate over the next 10 years, particularly for light vehicles. Light vehicles currently account for 36% of oil demand, so this is highly likely to see the end of oil as our major energy source.

Conclusion

The coronavirus pandemic has reduced demand for oil and other fossil fuels but these markets were already dealing with oversupply issues. Moving forward, the pressure to reduce carbon emissions and air pollution, together with the increasing competitiveness of renewable energy and electric vehicles, is likely to spell the demise of oil and other fossil fuels.

We continue to recommend to move away from fossil fuel investments (oil, coal and LNG) and we note that these stocks (WPL, STO, OSH, ORG and WHC) have underperformed for the past 10 years and this trend could worsen.

Performance of fossil fuel stocks vs the S&P/ASX 200 (blue), 10-year chart

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