In the mind of many a news consumer, oil is on its way out. So is coal. So is gas, although that one might stick around for a little longer. We are, after all, moving into a new era of clean energy, and while it will take us some time to get there, it’s our only option for a future. And fossil fuels have no place in that future.
The latest oil, gas, and coal price rally, therefore, must have come as a shock to that hypothetical news consumer. It turns out, this rally said, that news does not always reflect reality. Neither do oil and gas price forecasts. Remember when there was a gas glut, as recently as last year? Everyone said it would persist, keeping prices low. But it didn’t. The glut ended quite suddenly this year.
Predicting oil—or, apparently, gas—prices is a notoriously uncertain business. This, however, is not stopping hundreds if not thousands of people from doing it on a daily basis, with varying degrees of success. Right now, most forecasters seem to expect prices to continue rising because there are simply too many factors working to support them.
Over the longer term, predicting oil prices becomes even more challenging. Right now, it is especially challenging because few forecasters appear to have anticipated the current rally, and now a flurry of revisions are being made, according to a New York Times report. The revisions are not about average oil prices this year and next, however. They concern peak oil demand: one of the few necessary conditions for every net-zero scenario.
The dominant narrative is that the renewable energy rush will kill off oil demand growth in a few years, a decade at most. Yet this narrative never foresaw the current rally for some reason. It never factored in the possibility of a surge in the demand for coal, not just in the usual place—emerging economies—but in countries such as the United States, where coal consumption is on track to rise for the first time since 2014. The energy crunch this year disrupted a lot of narratives.
The short-term price outlook is quite fascinating. Crude oil inventories are being drawn down across the world, and OPEC+ is sticking to its original decision to add just 400,000 bpd to combined monthly output. It is, however, not doing even that because some of its members are struggling to fill their production quotas due to underinvestment that has been plaguing them for years.
Demand, meanwhile, is rising, with the energy crunch seen adding anywhere between 500,000 bpd and 750,000 bpd to the global daily average. This, combined with reports that U.S. crude oil inventories are some 6 percent below the five-year average for this time of the year, and that OECD inventories are 162 million barrels below the pre-COVID five-year average, has been very effective in keeping prices above $80 per barrel and spurring forecasts for three-digit prices.
This is what usually happens when prices are rising, but this time the rise was not exactly the usual one, part of the cycle of commodity prices. This time, prices were pushed up by a severe shortage of energy sources—fossil fuel energy sources. This fact could have spurred a much-needed discussion about governments’ approach to the renewable energy shift, but it hasn’t, not publicly. Yet it has spurred doubts that the shift would work exactly as governments plan it. And price forecasts reflect these doubts.
Some are already talking about $200 Brent and not only talking but betting on it. These may be crazy bets, but they do reflect a heightened uncertainty about the prospects of oil demand, much more heightened than usual. In reality, Brent rising to $200 a barrel could only happen in case of a severe reduction in production, and that is unlikely to happen as soon as next year, if ever.
But besides the crazy bets, there are also other signs that the demise of fossil fuels has been greatly exaggerated. Fund managers are returning to oil and gas stocks, Reuters reported this week. Despite the push into ESG investing over the past few years, funds are now eager to boost their exposure to oil and gas, thanks to this year’s stock price rally. Energy stocks have outperformed the S&P 500 substantially: they’ve booked a 53.8-percent increase over the past month, versus 20.2 percent for the broader index.
Now, the biggest question is about the longevity of the rally. No oil price rally lasts forever but, according to the NYT, this time there are two quite different explanations that would determine the longer-term outlook for oil price movements. One is for a short-term price boost from pandemic-related factors. The other is a disparity between emissions ambitions and the capabilities to fulfill these ambitions.
Some would like to bet on the first explanation: that the current oil price rally is little more than a fossil fuel version of the dead cat bounce and fossil fuels are truly on their way out under the advance of wind, solar, and hydrogen. Yet, the second explanation rings truer in the context of investment decisions.
A recent UNEP report warned that oil and gas production plans by the 15 biggest producers are at great odds with the Paris Agreement emission targets. In other words, these 15 biggest producers continue to bet on oil and gas, despite emission ambitions, including their own stated net-zero targets. Oil may not reach $200 next year or ever, but it might end up being around and in wide use for longer than many might have hoped and believed.