PINDER: Oil... the demand just keeps growing

This is the third in a four-part economic lookahead prepared by Saskatchewan businessman Herb Pinder. Read the first and second part, here..PINDER: Sustained growth likely in 2025 but not so much in mature economies.PINDER: After Trudeau, things can only get better.The single most important fact about oil is continued global growth in demand, that now exceeds 103 million barrels per day (mb/d.) In the last many decades, there have been very few years of reduced consumption, and only from unusual circumstances, most recently the COVID pandemic.DEMANDIncremental demand derives mostly from developing countries, whose people want the same lifestyles we enjoy. The sincere but inadequate (for climate fearmongers) attempts of developed countries to decarbonize have contributed to the flattening growth profile of oil, which tends to plateau anyway, as economies mature. The traditional forecasters include OPEC (the Organization of Petroleum Exporting Countries), the EIA (the US Energy Information Administration), and the IEA (International Energy Agency). Their 2025 oil consumption forecasts are for further increases — OPEC 1.5 mb/d, EIA 1.22 mb/d, and IEA 1.0 mb/d. Demand grows with rising economies: the recent slowing of the oil growth rate in 2024 and 2025 can be traced to China's reduced economic growth in those years. (See Part I). Future demand will likely be more driven by India, which recently surpassed China in population. It is also the beneficiary of a younger population and India’s British Empire pedigree including education and free markets, imperfect as they are in that country.SUPPLYSupply is primarily managed by OPEC, but is also influenced by market dynamics. The formal OPEC+ group is supplemented by several additional producers, including Russia, one of the top three global producers along with Saudia Arabia and the United States. OPEC+ adjusts supply to accommodate demand while targeting a price range. An estimated 5-7 mb/d are currently withheld. .There is a more aggressive approach. Recall that on June 20, 2014, the Saudis began sustained overproduction that ruined the economics of the industry, enduring for several years. The desired outcome for fellow OPEC + producers now is a high level of discipline, in line with Saudi leadership. For North American and other free market producers, the industry has changed dramatically. Responding to investor expectations, the business model has evolved from creating value through the drill bit (growing reserves and production) to managing the balance sheet to fund dividends, and during periods of undervaluation, share buybacks.However, as the EIA pointed out in a September report, since 2016 OPEC+ production is DOWN more than 5 mb/d while non-OPEC production is UP more than 10.5 mb/d. Much of that is the result of the dramatic growth of American shale oil, particularly in the Permian Basin. Notwithstanding a loss of market share, the Saudi overproduction strategy is unlikely to be repeated because lower prices mostly benefited global consumers, not producers. Currently, OPEC+ pumps about half of the world's oil and continues to extend its supply cuts to support prices. Another reason for the Saudis to manage the market is their control of Aramco, the largest public production company in the world. Saudi Arabia is more aligned with other global producers since Aramco’s IPO.It is possible other dynamics could strengthen pricing pressure. Both Presidents Obama and Biden ignored US sanctions on Iranian production, unlikely to continue once Trump is in power, or Israel continues its security imperatives.Another longer term inevitable outcome is the maturity of the Permian Basin. Credible analysts suggest current production, exceeding 13 mb/d, has already peaked and the inevitable decline has begun. Has peak oil arrived in the US?Another question — is Trump planning to replenish the Strategic Petroleum Reserve which Biden drained to lower domestic oil prices?For years there have been doubters about Saudi productive capacity. The current nameplate is 11mb/d (current production is 9 mb/d), but its major fields have been under waterflood for decades.Since the controversial book ‘Twilight in the Desert’ by Matt Simmons in 2005, there has been doubt about Saudi long-term productive capacity. This prognosis is enhanced by the lack of transparency versus the demanding reserve disclosure requirements in Canada, the US, and elsewhere.The more conventional business model will see moderate capital budgets in much of the other half of the producing world, and modest increases in global production from Canada, Guyana, Brazil, and Argentina. Combined with OPEC supply management, a price range between US $65 and $85, or narrower, is a reasonable expectation.Demand growth will continue for the foreseeable future, but beyond 10 years who knows what will happen with weather, politics, and public opinion. Just remember that the 1930’s featured a decade of warmth, dry winds, and drought through much of North America such that a major depression resulted.What followed was not one, two, or three, but four decades of cooling, leading to a broad consensus (including the fickle media) that another ice age was nigh.So, we humans, wired to linear thinking, cannot predict future weather or the longer term climate. Maybe carbon related issues that impact demand for fossil fuels will become less relevant.For Canadian producers, our weakening Canadian dollar increases revenues, as is the case for all exports. The TransMountain pipeline, moving oil offshore, has eliminated (for the time being) competition for pipeline access, also improving netbacks.In the meantime, and possibly for the foreseeable future, the managed oil market provides predictability for a volatile commodity. These whispers of stability are subject to Saudi leadership, continued military disruption, Iranian sanctions, and other unpredictable events in an unsettled world. Part IV highlights the opportunities for natural gas, and concludes the series.