Oil’s extended reign? Adapting to a new era in oil markets

Oil Market Outlook and Demand Drivers (Goldman Sachs, June 2024)

• Price Forecast and Range: Brent crude oil is currently trading in a $75–$90 per barrel range; the $90 ceiling is maintained by approximately 6% of global crude production capacity remaining idle, primarily in Saudi Arabia and the UAE.
• Market Balance: Despite short-term volatility from inventory builds in spring and geopolitical speculation, the market remains balanced as OPEC aligns supply with demand growth and non-OPEC production increases.
• Peak Demand Timeline: Goldman Sachs now forecasts global oil demand will peak around 2034 and plateau thereafter, revising earlier estimates forward from 2024 due to strong emerging market growth.
  • Demand Revision: The 2030 demand forecast was raised to 108.5 million barrels per day (bpd) from 106 million bpd.
  • Growth Rate: Oil demand is expected to grow at an average of 1 million bpd annually through the end of the decade.
• Income-Demand Relationship: Demand growth follows an "S-curve" relationship with GDP; as countries exceed $2,000–$3,000 per capita, consumption accelerates due to increased demand for appliances, petrochemicals, vehicles, and aviation.
• Regional Demand Shifts:
  • India: Projected to be the fastest-growing oil demand region; rising motorbike electrification may be offset by a rapid expansion of the passenger fleet and appliance adoption as incomes rise above $2,500 GDP per capita.
  • China: While internal combustion engine (ICE) sales penetration is forecast to drop to 10% by 2030, oil demand will likely peak only in the late 2020s driven by petrochemicals and jet fuel.
  • Jet Fuel: China is expected to contribute over 50% of global jet fuel demand growth between 2024 and 2040.
  • Crossing Point: For the first time in history (excluding 2022), China and India are projected to contribute equal oil demand growth (approx. 0.3 million bpd) this year.
• Electric Vehicle (EV) Penetration:
  • Current Sales: Nearly 10 million EVs were sold globally last year, but sales stagnated year-to-date in the US and Europe.
  • Base Case Forecast: EV sales are expected to nearly triple from 10 million to over 30 million annually by 2030.
  • Sensitivity: A 10% lower EV penetration rate in 2030 would push the oil demand peak beyond 2040, with demand potentially reaching 113 million bpd by 2040.
• Supply Investment Trends:
  • Capital Allocation: Investment has shifted from long-cycle projects to short-cycle ones (e.g., US shale, brownfield developments) due to demand uncertainty.
  • Reserve Life: Oil reserve life has decreased by 25 years over the last decade.
  • Capacity Outlook: Supply remains comfortable through 2026 due to spare capacity, but uncertainty increases significantly for the latter half of the decade due to low investment.
• Refining Sector Constraints:
  • Structural Tightness: Unlike crude supply, the refining system is structurally tight and vulnerable; the median age of refineries in developed markets is 53 years.
  • Capacity Closures: Nearly 4% of global refining capacity has closed since the pandemic, while oil demand has rebounded 1–2% above pre-COVID levels.
  • Product Mismatch: New capacity additions are gasoline-heavy, creating a deficit market for diesel and jet fuel through 2027.
  • Margin Outlook: Refined product margins (the spread between crude costs and product prices) are forecast to be structurally higher and more volatile than crude prices.
• US Election Implications (2024):
  • Republican Policy: A potential Republican sweep (e.g., Trump re-election) is viewed as modestly bullish to neutral, with upside risks primarily from potential tightening of Iran sanctions.
  • Demand Impact: Fiscal easing and potential EV tax credit pullbacks could support gasoline demand, while a stronger dollar and higher interest rates could weigh on prices.
  • Net Effect: The quantified impact of Iran sanctions is the dominant factor, skewing risks slightly to the upside.
• Inflation Hedging Strategy:
  • Gold vs. Oil: While oil traditionally hedges inflation, gold is currently identified as the superior hedge against policy-driven inflation risks (tariffs, loose fiscal policy, geopolitical escalation).
  • Oil Role: Oil remains a secondary hedge, most effective when it is the direct source of inflation rather than when inflation is driven by demand or policy shifts.

Long-Term Price Assumptions and Volatility Risks

• Long-Run Price Target: The base case long-run oil price assumption is approximately $80 per barrel.
• Volatility Outlook: Price volatility is expected to increase significantly in the latter half of the decade as US shale matures and OPEC spare capacity declines.
• Stranded Assets: Refining is considered a "stranded asset" risk for integrated oil companies, as decarbonization pressures reduce long-term demand while feedstock dynamics (crude scarcity) remain tight.
• Forward-Looking Statement: Future results are subject to significant uncertainty regarding geopolitical developments, regulatory changes, and the pace of the energy transition; past performance does not guarantee future results.