No one can predict oil demand peak

– Aramco’s chief’s claim that the energy transition is failing has a point in terms of the slowness of the progression of the transition away from fossil fuels to greener energy sources. 

– For instance, while policymakers are pledging ambitious climate targets, they are not aware of the scale of the challenges and speed needed to achieve such targets.

– To date, the energy mix is still dominated by fossil fuels and unlike previous transitions that were driven by economics, the current transition is driven by a change in consumer preferences. It is therefore unlikely that the targets set would be achieved in a short period of time.

– Despite many forecasts of when oil demand will peak, the reality is that nobody is able to accurately predict the timing of when that peak will be reached.

– Additionally, each forecast is based on a different set of assumptions, largely based on government policies which are themselves unpredictable. 

– Even if the International Energy Agency (IEA)’s forecast that oil demand will peak before the end of this decade turns out to be accurate, the behaviour of oil demand decline after that peak is still ambiguous. In any of the cases, what is certain is the fact that oil will still constitute a significant portion of the energy mix and the demand for it won’t disappear overnight.

– If no investments in new oil projects were made, the world will likely see a tight market which would translate into higher oil prices as in 2022. The main lesson from 2022 is that all governments, with the exception of oil exporters, do not like high energy prices as this will pose a threat to their longevity.

– Oil prices have recently hit their 4-month high. While largely driven by OPEC+’s announcement to extend their cuts till summer 2024, other factors have added to that upward pressure including, but not limited to, attacks on Russian refineries, rising geopolitical tensions in the Middle East with no end in sight, declining US oil inventories, and positive economic data from China.

– The big question is whether these forces are going to be sustained to justify a lasting rally in prices. For example, data from China, the biggest driver of oil demand growth, reflect strong activity due to the Chinese lunar year, while the country still faces structural challenges in its economy.