The October vintage of the IEA’s oil market report grabbed headlines Thursday as the world’s energy crisis continued to dominate the macro narrative.
Mercifully, the agency’s reports are amenable to summary treatment, which sets them apart from other expansive takes on the market, which tend to be somewhat daunting to the extent you can’t easily extract key points.
Gas-to-oil switching could add 500,000 barrels per day to oil demand over the next six months versus “normal conditions,” the report said. Switching assumptions were in part responsible for 170,000 b/d and 210,000 b/d upward revisions to the agency’s 2021 and 2022 forecasts, respectively.
Overall, oil demand globally is projected to increase by 5.5 million b/d this year and 3.3 million b/d next. In 2022, demand will be “slightly above pre-COVID levels,” October’s report said.
Oil prices have, of course, risen sharply of late (figure below) as the gas crisis makes crude look like a bargain.
Higher energy costs are feeding price pressure fears at a time when many market participants have become obsessed with the threat (real or imagined) of 70s-style stagflation.
“Next year is shaping up to be one of the rare parts of the cycle not led by supply exclusively, or demand exclusively as many cycles are. Instead, it is shaping up to be led by both strengthening demand and tightening supply simultaneously,” RBC’s Michael Tran and Helima Croft wrote. “Such a dynamic has not existed, on a protracted basis, in a decade,” they added.
Whether the current environment qualifies as a “supercycle” or not, RBC is sticking with the view that “the oil market remains in the early days of a multi-year, structurally strong cycle.”
They’re hardly alone. Goldman recently said crude is moving “from a cyclical to a structural bull market,” BofA’s commodities team warned the world is “a storm away from the next macro hurricane” and JPMorgan expressed concerns about “supply, demand, cost of capital and energy transitioning issues for all fossil fuels,” many of which may continue to experience outsized price spikes.
In its October report, the IEA summed things up well, writing that,
The surge in prices has swept through the entire global energy chain, fueled by robust economic growth as the world emerges from the pandemic. Record coal and gas prices as well as rolling black-outs are prompting the power sector and energy-intensive industries to turn to oil to keep the lights on and operations humming. The higher energy prices are also adding to inflationary pressures that, along with power outages, could lead to lower industrial activity and a slowdown in the economic recovery.
That passage has stagflationary vibes. Although the agency noted that “world oil supply is projected to rise sharply in October as US output bounces back from Hurricane Ida and OPEC+ continues to unwind cuts,” the IEA warned that “the world is not investing enough to meet its future energy needs.”
Meanwhile, Saudi energy minister Prince Abdulaziz bin Salman patted himself on the back for his performance as market micromanager and suggested that if only all energy markets were controlled by cartels, the world might be a better place.
“What we see in the oil market today is an incremental increase of 29%, vis-à-vis 500% increases in gas prices, 300% increases in coal prices, 200% increases in NGLs,” Abdulaziz told a forum in Moscow.
“Gas markets, coal markets, other sources of energy need a regulator,” he added. “This situation is telling us that people need to copy and paste what OPEC+ has done and what it has achieved.”