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Oil as the main asset in the energy resource market

2020-09-16

2020-09-16

OPEC’s and BP’s reviews of the energy resource marketMikhail Hypov

This article will deal with the energy resource market in general, and oil prices in particular. My current interest in black gold is due to the OPEC’s oil market [report][1] published on 14th September, and BP’s [energy outlook][2] 2020.

What are those reports about? How have they affected the current and future oil markets? Is my [June’s long-term crude oil scenario][3] still up to date? Let’s find out!

The article covers the following subjects:

Impact of OPEC’s and BP’s reports

In the chart above we see that the reports didn’t have any negative impact at the moment of publication. Neither did they provoke panics or sales. I marked the period ranging from a few hours before and a few hours after the publication with a red circle. The fall didn’t even update the previous local low.

Panics didn’t affect British Petroleum’s stock chart either, but the local low was updated.

The market impact on the stock quotes was rather positive and held the collapse back. The S&P500 was growing on the reports publication.

I can conclude that these reports’ market effect is overrated, and actually they didn’t play an important role. Another explanation could be the fact that the reports’ main conclusions have already been factored in the prices.

In the chart above, WTI oil prices and the S&P500 were falling at almost the same time at the beginning of September. So what was the reason for the markets’ decline? And what conclusions do these two reports contain?

Contents of OPEC’s and BP’s reports

OPEC’s report didn’t have any surprises inside.

The post-crisis economic recovery period will take more than 1 year.  As the table above suggests, the global economy will fall 4.1% in 2020. The outlook for 2021 still looks optimistic. The global economy is expected to grow 4.7%. China will be the main growth driver: its economy suffered the least and kept its positive growth rates. India is the next driver as its economic recovery tempo is expected to cover the damage.

The chart above shows that the 2021 general oil demand growth will be 6.6 million barrels a day, which is less than the 2020 demand slump. Thus, OPEC doesn’t forecast an oil demand recovery next year.

Next, the OPEC experts downgraded the forecast for potential oil demand by 0.4 million barrels a day. It happened following the US Energy Information Administration’s 0.5 million bbl downgrade, so the news wasn’t a surprise.

OPEC’s main concern is the second coronavirus wave, forecasted from September to December 2020, i.e. now. The second wave may be more damaging to the main oil importing countries than expected. In the first place I mean India, China and the Asian region. Analysts believe that the weak low demand may continue in the first six months of 2021.

At the same time, experts singled out another factor that drops oil prices: the growing production in the non-OPEC countries. The USA is expected to be one of the leading producers, with the monthly output rise of 0.12 million barrels.

Despite expectations, low oil prices didn’t fully destroy shale oil production in the USA. The chart above shows that the number of drill rigs plateaued out. So I can conclude that all costly projects have already left the market, and only those are left who can afford to survive amid the current oil prices. In future, these survivors may increase oil output fast. British Petroleum provided a longer-term and deeper analysis of the oil market and other energy resources, which you can check out [here][2].

One of BP’s important conclusions is that global oil demand will never recover to pre-crisis volumes.

British Petroleum’s report includes three scenarios.

  • Business-as-usual. Implies that the global policies concerning CO2 emissions and non-renewable energy resources remain unchanged, and the current ecological doctrines will be preserved.
  • Rapid. Implies a set of intergovernmental measures and political decisions aimed at reducing carbon emissions and combating global warming.
  • Net Zero. Under this scenario, the social behaviour changes in a way that helps preserve environment and is favourable to ecological materials and technologies.

As the chart above suggests, oil consumption is present in all three scenarios up to 2050. However, BP is inclined to choose the Rapid or Net Zero scenarios.

There are several reasons.

1. Global warming

The heat map above shows that only northern countries, such as Canada or Russia, may profit from climate change: glacier and permafrost melting will give access to natural resources and make their production more profitable. On the other hand, even those countries won’t escape such negative consequences as coastal flooding and entire cities’ submergence.  The most of the world will be in a great crisis. As all the economies are interdependent, everyone will lose, ultimately.

Bloomberg has conducted an [interesting research][4] into global warming.  The interactive map from that research visualizes climate changes in time. Warming by 3 degrees is considered to be critical. Not only will it provoke disastrous floods, but also lead to soil erosion, destruction of relict forests and extinction of animals and plants.

Thus, the society must be ready to assume radical measures to cut CO2 emissions and prevent their negative effects.

2. Negative Covid effect

BP forecasts the coronavirus’ more serious damaging effect than OPEC does. The chart above shows two scenarios in which global GDPs and demand for traditional energy resources and fuel drop. Under the negative scenario where the virus develops in a few waves, the fall doubles. However, the oil demand will have fallen almost 3% by 2025 under the optimistic scenario too. The market’s structural changes explain that effect: the pandemic has changed our lifestyles forever. The remote services are being introduced faster. Business trips became less necessary, while the current technologies allowed organising workspace at home. Thus, the market fell in the areas that can’t be transformed into online services. Transport services are especially susceptible to such changes, and the approach to using individual transport is changing too. People just don’t need to drive often now. Ultimately, it will result in lower oil consumption.

3. Lower cost of solar and wind energy

The chart above shows that these costs will be reducing no matter the scenario. The year 2018 is taken as a reference price. By 2040, solar energy costs will have reduced almost twice, while wind energy costs will have dropped 20%.

Even under BP’s conservative scenario, the share of solar and wind energy will exceed the share of coal or gas power plants. Thus, the demand for hydrocarbon resources will be falling.

4. Changes in transport infrastructure

According to BP’s modest estimations, electric vehicles will account for almost 50% of all transport means. The share of individual cars will drop, replaced by robotaxis and self-driving cars. Hybrid liquefied hydrogen powered vehicles will be developing too. Thus, gas/oil powered cars will become old-fashioned in 30 years, and oil consumption in the transport sector will drop significantly.

That’s all for now. I’ll continue to analyse British Petroleum’s report tomorrow. We’ll examine other interesting facts from that 80-page report, analyse BP’s main investment recommendations and check how this scenario will affect the oil price technically.

Bookmark this article not to miss the sequel!

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Best regards,

Michael @Hypov

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Price chart of USCrude in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. momr.opec.org/pdf-download/
  2. www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/energy-outlook/bp-energy-outlook-2020-presentation-slides.pdf
  3. www.liteforex.com/blog/analysts-opinions/commodity-market-analysis-oil-forecast/
  4. www.bloomberg.com/graphics/2020-climate-heat-inequality/?srnd=graphics-v2
  5. liteforex.com/blog/?author=72
  6. my.liteforex.com/?category=analysts-opinions&slug=opecs-and-bps-reviews-of-the-energy-resource-market&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
  7. my.liteforex.com/deposit/?category=analysts-opinions&slug=opecs-and-bps-reviews-of-the-energy-resource-market&promo_code=BLOG&utm_source=blog&utm_medium=article&utm_campaign=bonus