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No end in sight for fossil fuels

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Analysts expect global monthly demand to move above 104 million barrels a day (b/d) for the first time in August 2024 and further to above 105 mln b/d in August 2025.

According to the US Energy Information Administration (EIA), worldwide consumption averaged 101.1 mln b/d in 2023, narrowly beating the pre-pandemic record of 101.0 mln b/d in 2019.

Standard Chartered expects oil demand to average 102.7 mln b/d overall in 2024 and 104 mln b/d overall in 2025, which is contrary to the IEA’s forecast that oil demand will peak this decade.

In other words, these forecasts indicate that the beginning of the end of the fossil-fuel industry remains elusive.

Non-OPEC supply growth is expected to fall behind demand growth in both years, increasing the call on OPEC crude by 520,000 mln b/d in 2024 and 880,000 mln b/d in 2025.

US crude oil supply growth is expected to slow from 1,009 mln b/d in 2023 to 464,000 mln b/d in 2024 and to 137,000 mln b/d in 2025, although current drilling and capex plans suggest potential downside to these forecasts.

This is also confirmed by the EIA that expects little incremental US crude oil supply in 2024. Its forecast implies that the monthly average will not get back to 13.3 mln b/d until December 2024.

According to the EIA, average US oil production will amount to 13.2 mln b/d this year, rising to 13.4 mln b/d next year.

The EIA projects that total world consumption would average 102.34 mln b/d in 2024, as GDP growth stays below trend in major economies. Efficiency improvements and a booming electric vehicle fleet also impact oil demand growth.

New ME alliance

On the other hand, a new Middle East alliance could reshape the global energy landscape. Iran and Iraq’s partnership is significant due to their vast oil and gas reserves, strategic geographic location, and influence in the Middle East.

ExxonMobil has been in advanced talks with Algeria’s national oil company Sonatrach to enter into new oil and gas exploration projects in the country.

In early January there was a sharp decline in the crude oil price following Saudi Arabia’s decision to cut its official selling price for oil exports in February. But this decline also reflects traders’ concerns of steady growth in oil supplies from countries outside OPEC+ and an uncertain economic outlook.

So far, these are keeping a lid on prices this year, despite the Israel-Hamas conflict in the Middle East and tensions in the Red Sea.

At least for now, most traders conclude that the risk of unplanned escalation leading to a major confrontation, as well as disruption of oil and gas supplies to Europe or Asia, remains relatively low.

They are balancing those risks against wider economic and market forces that put downward pressure on prices, including a stronger US dollar and production growth outside OPEC.

At the same time, traders have been purchasing call option spreads on Brent crude, betting that oil prices will hit $110 a barrel by the end of March or April.

Saudi Aramco’s CEO, Amin Nasser, predicts tighter oil markets, and sees risks in relation to the situation in the Red Sea.

He said he expected the oil market to tighten after consumers depleted stocks by 400 million barrels in the last two years.

Last week, oil prices were pushed higher by renewed geopolitical risk after the UK and the US launched an attack on Houthi rebel positions in Yemen. Brent temporarily climbed above $80/barrel.

As a result, the escalation of tensions in the Red Sea has prompted multiple tankers to divert from the Suez Canal. It is disrupting global supply chains of fuel and goods and has pushed up freight costs, due mainly to an additional eight days needed to complete a journey around Africa.

Major juncture

No one knows how the situation could evolve in the next few days, but this is clearly a major juncture for Middle East energy geopolitics. Escalation risk remains.

As a Bloomberg report pointed out, the military action underscores the deepening fallout from the Israel-Hamas war.

The added costs of longer shipping routes and upward pressure on energy prices are not helping central banks trying to bring inflation under control and interest rates down.

Iran added to the problem by seizing an oil tanker off the coast of Oman as the threat to shipping in the Middle East spilled into one of the world’s most important oil export routes, increasing the threat of wider escalation despite efforts to contain the crisis.

Analysts say that the more serious risk to inflation is if oil and gas markets take fright at the prospect of a much wider Middle East conflict.

There are already signs that the rising tensions in the Red Sea, following Houthi militant attacks on commercial vessels, are starting to have an impact on energy prices and inflation in Europe.

Adding to the problems, drought is hampering operations of the Panama Canal, threatening global shipping traffic, including shipping of LNG and oil.

Climate risk a major concern

The World Economic Forum’s 2024 Risk Report has revealed environmental issues as the dominant concern of risk analysts, with concerns pertaining to climate change and temperature rise topping the list of risks for the coming decade.

In 2022, global consumption of coal surpassed 8 million tonnes in a single year for the first time, with China and India being the two biggest consumers in absolute terms. Fossil fuels still accounted for 82% of primary energy use globally.

A petrochemical glut makes new plastics cheaper than recycled, while the surge in manufacturing in China and the US is leading to oversupply of products such as polyethylene.

Davos 2024 started this week, with green issues at centre-stage. Conflicts in the Middle East and Ukraine, surging populism and concern about the climate and artificial intelligence are dominating the agenda.

Environmental risks, alongside misinformation, geopolitical conflict and cyber threats are the main topics of concern, with ESG falling out of favour, even as climate risks loom large.

Several EU countries have expressed support for plans to target a 90% emissions cut relative to 1990 levels by 2040.

Shell is under fire from Europe’s largest asset manager, Amundi, over its climate policy, demanding that the company improves its environmental targets at its annual meeting.

Going for continuity, BP appointed Murray Auchincloss as permanent CEO, signaling that it is likely to stick with the shift to greener energy launched by his predecessor Bernard Looney.

 

Dr Charles Ellinas is Senior Fellow at the Global Energy Center, Atlantic Council

X: @CharlesEllinas