Transition to have limited effect on oil demand: Argus

Any decline in global oil demand over the coming years will be slow, while crude prices are unlikely to rise unabated in the short term, delegates heard at the Argus crude forum held today during the IP Week conference.

Argus' global head of oil Euan Craik said that oil demand will be subject to "a tug of war" between the energy transition in Europe, China and the US, and strong economic growth in developing economies.

"By post-2030, when we reckon electric vehicles will have accounted for 2mn-3mn b/d of motor fuel, we will see a gradual decline in oil demand," he said. "It will be very gradual."

By 2040, Argus estimates oil demand to slip just under 100mn b/d.

"It is worth noting that this is really in line with the levels we just came from in 2019, so it will be a very slow decline in oil demand even as new forms of energy come on stream and account for more of the pool," Craik said.

Argus' vice president of crude James Gooder said that global prices, which have risen above $60/bl and settled at one-year highs this week, are unlikely to rise inexorably as the year progresses.

"The exuberance that we have seen coming back in other commodities markets has spilled over into oil markets and we see futures well supported right now, and a lot of physical differentials have had to correct downward to account for that, which suggests that perhaps there is a correction coming," he said. "Therefore I do not think we are on a one-way track to $70-80/bl oil by the end of the year. But levels at the current market around the mid-$60s/bl are not impossible."

Gooder said that the spread between Brent and WTI could evolve, particularly as WTI is added into the Dated basket. Addressing concerns that if WTI turns negative again, as it did in April last year, this could drag Brent down in tandem, Gooder said: "The important thing to remember about WTI coming into Brent is that it is the European price for WTI, rather than the Cushing price or the US Gulf price.

"For the time being, we forecast that the spread between Brent and WTI Nymex in Cushing will remain at about $3/bl over the coming year or two, though of course any change to either contract will have a significant impact," he said.

As far as the Asia-Pacific market is concerned, Argus' editor for Middle East and Asia-Pacific crude Azlin Ahmad highlighted Murban crude's increasing relevance as a light-sour benchmark. The March launch of the ICE Futures Abu Dhabi (IFAD) contract will give Murban its own outright price determined by the market.

Murban already acts as a price reference for many Asia-Pacific refiners that buy light crudes like WTI, Russian Sokol, Caspian CPC Blend and Azeri BTC Blend, and the prices of these heading to Asia-Pacific have converged around the Murban value over time.

"Murban, with its healthy export volumes and active spot trade, is the most liquid and most relevant crude within Asia, and therefore should be the price determinate for light crudes," Ahmad said.

The grade's relevance as a price reference for light sour crudes has increased exponentially since early last year, when Qatar and the UAE switched from retroactive formula pricing to month-ahead, similar to how state-controlled Saudi Aramco and other Mideast Gulf producers approach the process. This aligned Qatari and UAE crudes more with official export prices for similar quality crudes, and allowed refiners in Asia-Pacific to better compare the price of Murban to incoming arbitrage cargoes.

"The IFAD contract will take this one step further by assessing prices two months forward, meaning it will be aligned with the Asian spot crude market because many Asian refiners buy their cargoes many months ahead," Ahmad said. "It will therefore provide the market with a solid indication of the value of light crude loading two months ahead, similar to how the DME Oman/Dubai futures contract provides an indication of the forward value of medium sour crude."

By Felix Todd