Vantage Point Advisors’ Energy Blog October 2021

Energy in 2045: OPEC’s Point of View

Last week, the Organization of Petroleum Exporting Countries published its World Oil Outlook 2045. [1]  Below are some insights [2] from the 800-pound gorilla of global oil producers.

1. Oil Demand Continues

OPEC’s base case forecast is that global oil demand will rise from now until 2045. “Global primary energy demand is expected to increase by 28% in the period between 2020 and 2045, with all energies required, driven by an expected doubling in size of the global economy and the addition of around 1.7 billion people worldwide by 2045.  OPEC’s report goes on to note that “all energies witness growth, with the exception of coal. Renewables see the largest growth, followed by gas, but oil is still expected to retain its number one position in the energy mix.”

In terms of annual growth rates (CAGR), for the economy to double over 25 years implies approximately 3% annual growth, and for energy demand to increase by 28% over 25 years implies approximately 1% annual growth.

2. Population growth driven by other countries

OPEC’s report shows that the growth will come from countries where electricity may still be substandard and a car — any car — is a valuable asset.  “The global population is expected to reach 9.5 billion people by 2045. Future demographic trends are marked by an aging population, a rising working-age population and increases in urbanization and migration rates. The global working-age population (15–64) is projected to rise by around 900 million throughout the projection period.”

global economy 2020 and 2045

3. Don’t Count Out Renewables

OPEC sees renewables comprising just over 10% of the global fuel source in 25 years. Additionally, OPEC projects that coal keeps dropping, oil slumps a little and natural gas grows. “Demand for other renewables is projected to expand from 6.8 mboe/d [million barrels of oil equivalent a day] in 2020 to 36.6 mboe/d in 2045, representing the single-largest incremental contribution to the future energy mix.  Moreover, it is also the fastest-growing energy source with its share in the global primary energy mix above 10% in 2045, up from just 2.5% in 2020. This is driven by falling costs and policies focused on reducing emissions.”

World primary energy demand by fuel type, 2020-2045

4. Electric Vehicles Will Have an Impact

According to OPEC:

“The total vehicle fleet is expected to reach 2.6 billion by 2045, increasing by around 1.1 billion from the 2020 level. EVs are set to approach 500 million by 2045, representing almost 20% of the global fleet. Some growth is also projected for natural gas vehicles (NGVs), with an expected increase of 80 million projected between 2020 and 2045. As a result, internal combustion engine (ICE) vehicles are set to maintain their leading role in the composition of the global fleet. The outlook sees ICEs constitute about 76% of the global vehicle population by 2045, largely sustained by the fleet size increase in developing regions.”

Composition of the global vehicle feet, 2020-2045

5. US Oil Drilling / Fracking Expected to Grow

Contrary to the “capital expenditure discipline” being touted by many oil and gas majors, OPEC sees a “return to growth” for fracking in the U.S.

According to OPEC’s report, “Supportive market fundamentals should incentivize a return to growth for U.S. tight oil production from 2022, which is expected to rise from 11.5 mb/d [millions of barrels per day] in 2020 to 14.8 mb/d in 2026. Tight oil output is expected to peak at 15.2 mb/d in the late 2020s, with U.S. total liquids hitting a maximum of around 20.5 mb/d around the same time.”

As participants in this global economy, I look forward to seeing how oil supply and demand play out over the next 25 years.

WTI Strip Prices Increase

Considering October 4th’s price increase, spot prices and near-term futures prices for the WTI contract increased by approximately $8.00 per barrel.

Oil strip prices

However, the oil price curve remains in “backwardation” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on October 4, 2021, as well as the predicted crude oil prices based on options and futures markets. Blue lines are within one standard deviation (σ) of the mean, red lines are within two standard deviations.

WTI Crude Oil $/BBL

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $63.50 and $93.00 per barrel in mid-January 2022. Likewise, there is roughly a 95% chance that prices will be between $46.00 and $125.00. By mid-March 2022, the one standard deviation (1σ) price range is $59.50 to $96.00 per barrel, and the two-standard deviation (2σ) range is $39.00 to $137.50 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. If someone asks you longingly if oil will be at $90 per barrel again soon, you now can respond that markets indicate there is about a 16% probability that oil prices are expected to get there by this January.

For more information, contact:

Gregory E. Scheig, CPA/ABV, CFA, CMA
Vantage Point Advisors
Managing Director / Energy Practice Leader
Certified Mineral Appraiser
180 State St., Suite 225, Southlake, TX 76092
214.254.4801
gscheig@vpadvisors.com

[1] https://www.opec.org/opec_web/en/publications/340.htm

[2] https://www.cnbc.com/2021/09/29/brian-sullivan-five-key-takeaways-from-opecs-2045-oil-outlook.html