Oil: We still need (plenty) more supply – HSBC

Analysts at HSBC suggest that despite a likely peak in LDV demand in 2025-30, the peak in total oil demand still looks much further off  and they see a looming shortage of supply as a more pressing issue, pointing to upside in prices from current levels.

Key Quotes

“The rate of climate policy progress and technological advances in alternative transport means the outlook for global oil demand has become subject to an unusually high level of uncertainty.”

“Our model indicates that on most scenarios, a combination of higher Electric Vehicle (EV) sales and improving fuel efficiency in the internal combustion engine (ICE) fleet leads to a peak in light duty vehicle (LDV) demand for oil in the period 2025-30, albeit with limited demand erosion before 2030 or so due to the scale of the existing LDV fleet.”

“Total oil demand has the potential to continue growing for much longer, driven by more durable growth in demand for heavy goods freight, aviation and petrochemicals. As a result, scenarios point to a most likely peak for total oil demand in the region 2030-35. For context, at 40% EV sales penetration of the LDV fleet by 2040, we see 2040 LDV demand ~3mbd below 2016 levels, but total oil demand 10mbd above it.”

“The model also highlights that the sensitivity of demand to changes in efficiency of the ICE fleet is at least as important as changes in rates of EV penetration.”

“While our analysis points to an inevitable peak in global oil demand, we think the availability of adequate supply will become an issue a long way before this - possibly around the end of this decade. On our estimates even a highly progressive scenario from a climate perspective (i.e. consistent with global 2°C ambitions) still leaves a substantial supply gap to be filled, given the inevitable effects of long term decline rates and the lack of major new growth projects on conventional supply.”

“Short-cycle production such as US tight oil can meet some of this shortfall, but the last few months’ slowdown in US activity is clear evidence that the recent momentum of US growth won’t be sustained at prices around current levels. We think higher prices are needed to generate an adequate scale of short-cycle supply response (in the US and elsewhere), and to have a meaningful dampening effect on global demand growth. So almost whatever the uptake of EVs and other alternatives, the dynamics of the oil market point to upside in crude prices in the next few years. We continue to assume an average Brent price of USD70/b from 2019 onwards.”