Oil Price No Threat to Demand Yet

Benchmark Brent is eyeing $80 per barrel, raising alarms that oil prices could be reaching levels where demand destruction starts. But if history is any guide, Brent would need to surpass $100 to significantly change consumer behavior. In the near term, with stimulus money still sloshing around and consumers eager to resume their pre-pandemic lives, the risk of demand destruction from high prices looks remote (PIW Jun.25'21). OECD consumers have huge savings and want to enjoy their post-vaccination freedom. In the US alone, the Federal Reserve Bank of Kansas City calculates that consumers have socked away an additional $2 trillion during the pandemic. That is significant because the US accounts for 20% of global consumption of oil products. Although savings are not equally spread among the population, it means the higher cost of gasoline or airline tickets can be more easily absorbed. Pre-pandemic research from Society Generale shows that spending on oil as a percentage of global GDP only starts to bite under crude prices above $100. Non-OECD consumers -- awaiting vaccinations and less mobile than before the pandemic struck -- have also demonstrated the capacity to brush off higher product prices. Non-OECD demand growth registered at 1 million barrels per day annually with prices over $100/bbl in the 2011-14 period. Fuel prices are expected to spike over the summer as inventories continue drawing. This could temporarily create product prices typically associated with $100 crude. But such a development would trigger refiners to burn more crude, tightening crude markets but quickly replenishing drawn product inventories (PIW Apr.2'21). This crude buying could temporarily support higher crude prices, perhaps over $80/bbl, but they would be difficult to sustain (PIW Jun.11'21). Euphoric consumer sentiment is expected to more than outweigh the impact of higher prices. Opec-plus and other global crude producers are focused on product stocks, which remain inflated from the Covid-19 demand collapse, for market signals. Only after refiners return to higher throughput levels can Opec-plus declare victory (related). The general assumption is that $65-$75/bbl crude prices optimize both demand growth and producer income. While Covid-19 is reshaping consumer behavior, concerns that 2019 may have marked the peak for global oil demand look off base. Energy Intelligence forecasts oil demand to grow by 5.8 million b/d to 97.9 million b/d in 2021 and another 2.6 million b/d in 2022 to 100.5 million b/d -- putting it around pre-pandemic levels. The end of lockdowns and the rollout of vaccines are prompting consumers to travel more, but there are also more people working from home and commuting less, creating a push-pull effect on products like jet fuel and gasoline. People are also getting more goods delivered at home, boosting diesel demand. Crude oil refined into products like gasoline and diesel is covering 80% of global oil demand -- which is the portion that Opec-plus can impact with changes in output policies. The ubiquity of crude makes Opec-plus output policy effective. The demand balance is further met by 15 million b/d in natural gas liquids, 3 million b/d of biofuels, and 2 million b/d of refinery gains. Transportation fuels account for two-thirds of global demand, with demand for petrochemical products rising (PIW Jun.18'21). Higher prices risk triggering or accelerating new policies and technologies that could hurt future oil demand. However, policy changes and the energy transition will advance regardless of prices as governments seek to address climate change more seriously, including net-zero emissions targets in the US, Europe and China -- the world's leading oil consumers -- by midcentury. Old demand models that link economic growth to rising oil demand are increasingly less effective, and modeling is now more complex. Climate change impacts are increasing the urgency for policy action, which can facilitate the rollout of new technologies or fuels, like electric vehicles and hydrogen -- with the required infrastructure (related). Sometimes, policy actions have an immediate impact, like governments banning plastic bags or banning cars in cities to prevent pollution, as seen in China and India. Other measures take more time to manifest, such as higher fuel efficiency standards, or promoting alternative transportation modes.