Why oil may no longer be ‘the dominant fuel in the world,’ according to one analyst

Citi Global Head of Commodities Research Ed Morse joins Yahoo Finance Live to discuss energy and oil prices, short-term supply, Russian oil uncertainty, and the outlook for energy and oil markets.

Video Transcript


- It's been a tumultuous year for global commodities. And our next guest says investors should expect a last hurrah for oil after a possible recession in 2023 to 2024 with demand peaking somewhere between 2025 and 2029. That's a long time.

Joining us now, we've got Citi Global head of Commodities Research Ed Morris. OK. So Ed, help us drill down into-- I guess, pun fully intended-- help us drill down into exactly what you're basing some of the expectation off of here, especially given the rise in the move higher that we've seen in oil and the energy sector over the course of this year.

ED MORSE: Sure. The rise in prices in the last month or the last few weeks is just noise in the system. Prices are significantly lower by a lot than they were in March. We had Brent pricing in $125 in March and at $82 right now. So prices have come off a lot.

Part of that is short-term demand against short-term supply. Prices have gone up a bit because of uncertainties about how much Russian oil is going to be lost to the system as a result of the new price cap that the G7 and the EU have put on and partly because of the embargo on seaborne crude that Europe implemented on the 5th of December.

But your other question is a longer-term secular question. Normally when you get out of a recession, you have a spike in oil demand. We think that we'll have a bit of a growth in oil demand coming out of recession after this year, but we think it's not going to be as robust as is normally the case. And that's because we're seeing a peaking of transport fuel demand at a much earlier stage than people had thought previously.

Even in China, which has been the mainstay, the main force of growth and demand for oil since 1990, actually, we think that diesel demand already peaked in China. We look at the rate of growth in the last three years of electric vehicle penetration. We look at Chinese policy on reducing further the internal combustion engine in vehicles by getting a domination of electric vehicles over those. And we're going to see a drop in motor fuel demand and transportation generally speaking.

Yes, there's going to be increased air travel, but these are based on engines that are significantly more efficient than anything on average in use in 2019 before the pandemic. And we're also seeing a very big move in the next five years into sustainable fuels one way or another. So one of the big issues right now is conversion of refineries into making biofuels. Biofuels look like, smell like oil, but then don't come from oil.

We actually expect some 5 million barrels to 6 million barrels a day of new biofuel use between now and 2030. That, with the pressure to get off of oil in the transportation fuel market, really does spell, in our mind, the end to oil as the dominant fuel in the world.

- And what's your worst-case scenario for oil prices next year, and with that worst case being the US does enter a recession?

ED MORSE: So the worst case for oil prices is really a surge in production that comes from a bunch of sources and also a slow down in production. We should be mindful that there is spare production in the oil market. We should be mindful that the data on the US are kind of funny. The EIA published two different reports in the last week that are totally contradictory. One was the revisions upward on oil production in the United States, total liquids production in the United States. It reached the highest level ever, close to 19 million barrels a day for a combination of crude oil, natural gas, liquids, and biofuels.

It had a crude oil production level of about 12.3 million barrels a day, which is significantly higher than the weekly numbers for now. And they're predicting a number for next year that's lower than that. So their revisions have not been taken into account in their forecasts. And we expect that the US is going to be growing by a good 4 million barrels a day of crude and 4 million barrels a day of natural gas liquids.

So we think that the growth in supply might provoke the OPEC countries, OPEC Plus countries to say, hey, we tried, and we failed to put a floor under prices. The only way out is to monetize our resources and to fight the US and Canada and Brazil again by upping production and lowering the price. So there are a whole bunch of factors that can go into a low price that would be in the low $60 range.

- I mean, that makes it sound like any uptick in demand next year is more than-- is going to be more than absorbed by that ample supply that you're talking about. Is that a worst case, or is that-- that more sounds like a base

ED MORSE: No, it's not a base case yet. Our base case, by the way, is that oil demand growth next year is going to be around 1.2 or 1.3 million barrels a day. And our base case is that supply will be growing by twice that amount over the course of the next year, a good bit of that coming from the Western Hemisphere, from the US, Brazil, Canada, Guyana, Argentina, maybe Venezuela and even Mexico. But our base case is that the efforts to put a floor under prices by OPEC is a tough one when we have a slowdown in demand growth and more than ample production coming out.

- Ed, from what you've seen in EV adoption to this point, where does that begin to factor into some of your outlook, especially looking into 2025 and even out through 2029?

ED MORSE: Well, it looks pretty important. We look as though the EV penetration is at that accelerating point of an s-curve where you start low, flattish, and then you zoom up. And we think that zooming up is going to continue so that we get to the point that by 2029, at the current rate of that s-curve from what we see in Europe and China in particular, but also in the US, we'll get to the point of no return, actually, for gasoline demand.

- Ed Morse, Citi global head of commodities research, thank you so much for joining us this morning. Appreciate it.

ED MORSE: Thanks for having me again. Thanks.