Global oil consumption is predicted to hit an unprecedented peak this year, increasing by almost 40 percent. Despite the rise in electric vehicle purchases worldwide, fuelled by a predicted 10 percent of global auto sales, the demand for oil shows no signs of slowing.
In a report by Morgan Stanley, the dichotomy between the increase in electric vehicle purchases and the rise in oil demand challenges traditional expectations. With Norway leading the global electric vehicle market, having 80% of new auto sales, the country’s oil usage has not diminished. This trend is also observed in China, where the oil demand surged by 50% while electric vehicle penetration exceeded 20%.
A substantial portion of the global oil consumption comes from industries like jet fuel, petrochemicals, and industrial/residential heating. The International Energy Agency (IEA) projects these sectors to be the primary drivers of future oil demand. The current surge in oil demand is driven by improved jet fuel demand and stronger-than-expected global GDP growth.
While the shift towards renewable energy sources and net-zero emissions is underway, the decline in oil demand is not immediate. Predictions of a collapse in oil demand are considered overly pessimistic, and global oil demand is on pace to hit record levels by the end of the year.
Major oil producers such as OPEC and Russia have responded cautiously to the increased demand. However, underinvestment in oil production poses a serious concern, with a significant decrease in global capital expenditure for exploration.
The energy equities industry is faced with skepticism from investors, and the industry’s shift toward a more investor-friendly capital allocation approach, coupled with high normalized free cash-flow yields, presents substantial potential gains.
As energy transition continues, a rapid decline in oil demand appears to be at a distance. Therefore, the current levels of investment fall short of meeting potential oil demand growth, pointing to a compelling outlook for energy equities amid a period of “tighter for longer” oil market conditions.
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