Major bank sees abysmal demand growth for oil

Oil prices could bounce around between $50 and $70 through 2025, with both demand growth and supply growth slowing, according to a new report.

The oil market faces a steep supply surplus in the near-term due to the coronavirus and the prospect of demand destruction and economic deceleration. But the US shale industry likely won’t rebound from its current slump, at least not to the explosive growth rates of recent years, keeping supply in check.

“Shale production economics in the US continue to point to a Brent price floor around $50/bbl or a WTI price floor of $45/bbl,” Bank of America Merrill Lynch wrote in its report. In other words, shale drillers cannot make money below $50 per barrel.

By the same token, shale will grow with WTI $65 per barrel or higher, the bank said.

But others have warned that this isn’t just a cyclical downturn – the shale industry’s blistering growth rate may be over. Schlumberger’s CEO Olivier Le Peuch sees US shale growth slowing to between 600,000 and 700,000 bpd this year before falling to 200,000 bpd in 2021. Beyond that, it could plateau and not return to growth, Le Peuch told Reuters. “Shale production growth will go to a new normal...unless technology helps us crack the code,” he said.

Given that the industry is roughly $150 billion in hole over the past decade, the elusive promise of some future technology to “crack the code,” seems speculative. Shale’s best days may be in the past.

The latest EIA data shows production set to decline in March in all major basins aside from the Permian, with the Anadarko basin in Oklahoma, for example, expected to lose 10,000 bpd. The Anadarko basin is expected to lose 16,000 bpd in February.

Meanwhile, pressure on global finance to back away from fossil fuels is likely to only grow. “[E]nvironmental risks will start to impact energy asset values in a meaningful way, further reducing investment and setting the stage for increased oil price uncertainty in the years ahead,” Bank of America said. Big banks have already announced a slew of new financing restrictions on oil sands, Arctic oil, and coal. A new campaign by environmentalists called Stop the Money Pipeline aims to ratchet up the pressure on banks, insurance companies, institutional investors and asset managers to shut off the financial spigot to oil and gas drillers. It’s still early days on this front.

For shale companies built on a mountain of debt, slower production and negative cash flow will push a lot of drillers under water and unable to avoid bankruptcy. Already, there have been more than 200 bankruptcies in the North American oil and gas sector since 2015, according to Haynes and Boone. More are inevitable.

So, slowing US shale could keep global supply growth in check. But peak demand also looms. In its report, Bank of America Merrill Lynch says that demand will peak by 2030. By that year, roughly 35 percent of global auto sales will be electric, the bank says, up from 5 percent today. By 2050, EVs will capture virtually 100 percent of the market. “In other words, a switch to electric vehicles starting in the early 2020s would be strong enough to cause demand to peak within a decade,” Bank of America said.

The bank said that global demand growth could slow from 1.35 million barrels per day (mb/d) in 2021 to just 0.59 mb/d in 2025.

Ultimately, then, that means that both supply growth and demand growth are slowing, which is a bad equation for a sector that needs to continually grow in order for a lot of the finances to make sense. The finances of shale E&Ps, as previously mentioned, are already a mess.

But OPEC, too, faces a conundrum. Bank of America assumes that the cartel continues to cede market share in order to prevent oil prices from falling. The group could cut deeper this year, and then be stuck at those production levels through the middle of the decade, the investment bank said.

This article was originally published on Oilprice.com