Last Monday, we rolled out our initial 2020 oil price forecast and, concurrently, increased our long-term price deck by $5/Bbl, to $70 WTI and $75 Brent. This above-consensus long-term oil price outlook is largely premised on bullish supply-side factors, but the number-one pushback we have heard is: “will global oil demand be crushed by these higher prices?” Today we will focus on the demand side of the equation looking at the following: 1) How will the rising oil prices impact global demand?; 2) Where will future oil demand come from regionally?; 3) How will IMO 2020 impact oil product demand?; 4) How much and how soon will electric vehicles (EVs) impact oil demand; and, finally, (5) How will a rising U.S. dollar impact oil demand?. Our central conclusion is this: Due to the limited ability of the world to grow oil supplies at oil prices below $65/bbl, we believe oil prices will need to rise sufficiently to curtail oil demand growth over the next five to ten years.
Recap: on the heels of IMO 2020, we have increased our long-term price deck to $70 WTI and $75 Brent.
Over the past seven years, we have consistently held that global oil prices would need to average +/- $65/Bbl over the next decade for U.S. oil supply to grow enough to satisfy growing global oil demand and offset (on the whole) declining non-U.S. supply. As outlined in last month’s Stat about IMO 2020, we now anticipate that these shipping rules will have the effect of essentially erasing 1.5 million bpd of global oil supply in 2020 driving oil prices meaningfully higher over the next two years. Longer term, there are two structural headwinds for global oil supply that will become increasingly visible beyond 2020. First, the steepening base U.S. decline rates across U.S. resource plays will increasingly require a higher rig count – and thus higher industry cash flows – to counteract them. Second, low oil prices and the global oil industry’s capital discipline has led to reduced offshore/international spending, likely leading to non-OPEC, non-U.S. supply declines after 2020. Putting all this together, we now think oil prices over the next five years must rise sufficiently to slow the robust oil demand growth experienced over the past three years of low oil prices. (by Raymond James Research)
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