Energy watchdog warns of ‘staggering’ oil glut in the coming years

But others, OPEC among them, see demand growth continuing.

By Alexandra HartJune 17, 2024 2:49 pm,

The world may be headed for a major excess of oil supplies, according to a global energy watchdog. The International Energy Agency is predicting a “staggering” oil glut in the coming years, with demand forecast to peak before the end of the decade.

Matt Smith, energy analyst at Kpler, joined Texas Standard to discuss why and what it means for the industry. Listen to the interview above or read the transcript below.

This transcript has been edited lightly for clarity:

Texas Standard: I feel like I’ve heard these sorts of reports before. So peak demand before the end of the decade. I guess this is predicated on the idea that there will be a big transition toward electric vehicles, but there’s got to be a whole lot more to this calculus. 

Matt Smith: Absolutely. So the call has been from IEA that there will be a staggering surplus of oil.

And in a word, that isn’t going to happen, because the reason that the agency sees such a surplus is because it expects that oil demand is going to peak by the end of the decade. It is basing that view on the increasing penetration of electric vehicles and improved fuel efficiency of vehicles. It’s also looking at lower demand from developed nations, as well as less oil consumed for power generation in the Middle East and slowing economic growth in China.

So there’s all manner of things they’re basing this opinion on. But given such a weak demand outlook… That’s what’s driving the expectation that oil supply is going to vastly outpace demand, causing this staggering surface surplus.

But it just seems off, right? So oil may be a boom and bust industry. We well know that we’ve seen this before, but it does adapt to imbalances in supply and demand. And, really, IEA seems off on both of those things with their expectations here.

Well expectations are a big thing in the oil marketplace. Is anyone taking this report seriously? Or are people starting to think about, “okay, well, let’s look at futures. Let’s try to lock in lower prices.” Or maybe “we don’t do that if we’re talking about prices going down and there being an oil glut.”

I mean, is this affecting the numbers?

It isn’t affecting the numbers now, just because this is a longer term view in the grand scheme of things. So they’re still projecting oil demand growth in the next couple of years. And, you know, we really can’t look too far beyond that in terms of prices.

What about other agencies? And by “agencies” I really mean organizations. I’m thinking of OPEC, for example. What do they have to say about this IEA report and who do you follow here?

Yeah, OPEC has some thoughts on it.

So first of all, OPEC and IEA are at the opposite sides of the spectrum, right? The IEA is focused on policy, so has a natural tilt towards renewable energy – hence its bearish view on oil demand.

OPEC, on the other end of the spectrum, produces 40% of the world’s oil, so it’s going to have a “glass half full” expectation in terms of demand. So actually OPEC does not see a peak in oil demand in its long term forecast and is projecting demand growth continuing to at least 2045.

Now here’s the funny thing, though. So from IEA’s perspective, it’s forecast for shrinking oil demand could be completely derailed, it said, by relatively minor changes in events, whereas OPEC’s response to this has been much more combative. So the secretary general of OPEC described the IEA’s forecasts as dangerous and warned of energy chaos on a potentially unprecedented scale, I think they said, if producers stop investing in new oil and gas.

Boy, yeah, I sense a lot of extremes going back and forth here. What about you? I mean, you’ve followed the oil industry for many, many years. Where do you see demand peaking, if at all? I mean, this kind of prognostication’s dangerous business, I understand. 

No, no, that’s totally fair question.

So it’s a constantly moving target, right? But we should see global oil demand peak sometime next decade. So later than IEA expected, but earlier than OPEC.

In terms of the primary driver of that, it’s likely to be the electric vehicles – the penetration of them on a global scale – reducing gasoline demand. But we also have to temper that view with expected rising gasoline demand from Africa and other places in Asia, such as India.

[You’re] talking about developing economies.

Absolutely. So even the IEA’s view, you know, is very much predicated on oil demand dropping in developed nations, whereas it’s still continuing to increase from from developing nations, which it likely will continue to do so.

One thing to bear in mind, as well, is that oil demand is set to be supported going forward here over the next decade and beyond by the petrochemical sector. So that’s products such as propylene and ethylene. So they used to produce thousands of products from plastics to synthetic fibers, paints, dyes, the list goes on and on.

So as some oil products will drop in demand, others will continue to rise.

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