Oil forecast and the return of reality... this is the third in a series of economic reports from Saskatchewan businessman Herb Pinder.

The first can be viewed here, and the second here.

The oil forecast themes include continued growth of consumption, moderation of US shale production, the re-emergence of OPEC as the driver of price discovery, and acceptance of a new business model for the upstream component of the energy sector.

Supply and demand

OPEC is forecasting global economic growth of 2.8% in 2024 and demand for oil increasing by 2.2 million barrels per day (b/d). The world will consume more than 104 million barrels per day this year. OPEC lists growth dynamics that include “ongoing air travel, healthy driving levels, and the manufacturing sector”.

OECD (developed) countries consume about 46 million b/d, more evidence of its declining share which reinforces the view the developing world is now the growth driver. The “global climate crisis” folks should be fearful, as in 2025 more than 106 million b/d will be consumed, adding roughly 4 million barrels in two years.

OPEC+ has been managing prices by withholding up to 5 million b/d of production. It recently announced an orderly schedule to accommodate more supply as demand increases. The emphasis is on order, after a decade of unpredictable US supply growth.

Over the past decade in the US, utilizing the same technology as the “shale gas revolution”, oil production more than doubled. The current level of 13 million B/d is primarily a result of the Permian Basin. The US has become the world's largest producer, also exporting about 4 million B/d.

An oil engineer, King Hubbert, proposed a thesis in 1956 in his book, “Hubbert’s Peak.” Still valid today, he observed the point when production levels equate to half the reserves of the well, field, or basin, declines begin. The prolific Permian should begin to decline anytime.

This will signal the end of the US growth story which dominated recent markets and launched the US as the world’s largest oil and gas producer. But, subject to internal politics, it will remain the largest producer and a significant oil exporter for the foreseeable future.

This leaves the OPEC cartel back in control, successfully managing recent Brent oil prices between US$70-$85 per barrel.

The return of realism

Increasingly, the developed world (Canada’s federal government perhaps being the exception) is realizing that notwithstanding trillions of dollars invested in so-called clean energy, fossil fuels are the most efficient, abundant, reliable, and inexpensive solution. Market share has fallen slightly but remains above 80%.

It is sobering that the developing world consumes only 1-3 million b/d per capita of oil compared to the United States at more than 20. Difficult as it is today to escape the climate change echo chamber, the developing world is asking why it should solve the emissions problem created by OECD countries.

Fair question.

The answer is loud — ever more coal plants in China, India, and elsewhere, dramatic growth of natural gas, and as per above continued modest growth of oil consumption.

The International Energy Agency (IEA) was formed by the OECD to provide policy and analysis but has evolved after 50 years to “shape a secure and sustainable future for all”. The IEA has been under-forecasting oil consumption for the last several years leading to frequent mid or late-year adjustments. To its credit, the Agency eventually apologized and announced changes to its forecasting methodology.

Its belief-driven forecasting continues however, suggesting that structural changes and accelerated energy transition could see demand plateauing by 2030, leading to an oversupply.

Here realism is still trumped by beliefs; only time will tell. And if so, will capital not be allocated elsewhere, and OPEC continue its cuts?

The mea culpa also dismissed the net zero narratives, confirming the inevitable acceptance of the reality of fossil fuels, a thesis that Vaclav Smil articulated in his bestseller book “How the World Really Works.”

Changing economic model

The relentless fearmongering of the United Nations, environmentalists, and big government advocates adds a significant level of risk for investors in fossil fuels. Perhaps for that reason, and maybe also the COVID-induced price collapse of oil and natural gas prices, the economic model has adopted the same approach as the major and large independent companies.

The game in Western Canada, funded by private equity players, was placing capital with entrepreneurial start-up teams. Building an asset base, often in an untested area, was followed by a disposition to a larger consolidator. This popular model, for the most part, is diminished.

Producers of all sizes are now likely to focus on free cash flow (FCF), low-risk balance sheets, maintaining or moderately growing reserves and production. FCF is also shared with shareholders by way of reliable dividends or return of capital, and in times of low valuations (like now), share buybacks.

This model has been well received by the investment community. However, apart from some of the larger companies, valuation multiples have yet to return to previous levels. This is even more true in Canada, an obvious result of the anti-oil federal government.

Conclusion

The return to reality should narrow the valuation differential between Canada and the US. The importance of energy to economic growth, military and other security, current lifestyles and much more is regaining recognition after years of climate change anguish.

In Canada, the election of strong leaders in Alberta and Saskatchewan and the prospect of a change in government in Ottawa, portend better days ahead. The Trans Mountain oil pipeline and LNG Canada (gas pipeline and LNG infrastructure) better position the industry for the future.

The risk is that the IEA forecast is correct, and OPEC does not respond.

The energy sector is highly motivated to responsibly find, develop, and produce valuable hydrocarbons for the benefit of Canadians; and share our abundance with our friends and customers around the world.

Oil is a critical commodity. Canada is the fourth largest producer in the world with an environmental record second to none. The industry is back, and better. Together with the changing economic model, sensible Canadians are again recognizing both our good fortune and determination to responsibly manage our resources, and capture and share the benefits.

That is my forecast.

This was the third in a four-part economic report by Western Standard writer, Saskatchewan businessman Herb Pinder. Part four deals with the outlook for natural gas and runs tomorrow, Monday June 24th.

If the world needs oil, why shouldn’t it be Canadian Oil?

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