Morgan Stanley: Global oil supply likely to peak before demand

Nov. 8, 2021

Global oil supply is likely to peak earlier than demand, Morgan Stanley said in a research note, based on its analysis on current trends.

“The planet puts boundaries on the amount of carbon that can safely be emitted. Therefore, oil consumption needs to peak. However, this is such a well-telegraphed prospect that it has solicited its own counter-response already: low investment. The question has become, Morgan Stanley said, which will peak first, supply or demand?

According to Morgan Stanley’s analysis, the world’s population is expanding by 1 billion every 13-14 years, during which GDP per capita in real terms is set to increase by 35% as well. The deeply uneven distribution of energy consumption around the world puts upward pressure on energy demand too. Despite efficiency efforts, energy consumption will still likely grow, up 23% by 2040, the bank estimated.

Oil is set to lose market share, but demand isn’t likely to peak until the end of the decade, Morgan Stanley forecast. “Oil accounts for 31% of primary energy supply, but its share of energy supply growth is already lower at 20% and falling by 0.5% per year. We assume this will continue, and then treat the electrification of transportation as a separate additional headwind. On these assumptions, oil demand peaks at 105 million b/d by late/end of this decade.”

However, investment is already consistent with ‘Net Zero,’ likely causing a peak in supply mid-decade, Morgan Stanley said.

“In the International Energy Agency (IEA)’s ‘Net Zero’ scenario, oil demand peaks much earlier and falls sharply to 72 million b/d 2030. Yet, even in that scenario, the IEA estimates that the oil industry needs to invest $365 billion/year. Last year, global capex fell to $350 billion and has not rebounded in 2021, and probably won’t in 2022 either. If capex stays stable at current levels, global oil supply will likely roll over around 2024 and then decline sharply thereafter.”

Meantime, “sustained high oil prices are likely needed to restore balance: Unless more investment is forthcoming, or major demand break-throughs are made, oil prices will likely search for the level where some demand erosion kicks in. We raise our 2022 first quarter Brent forecast to $95/bbl and our long-term forecast from $60/bbl to $70/bbl,” Morgan Stanley said. Here Morgan Stanley defines ‘long term’ as the period starting in 2023 and stretching into the second half of the decade.

However, Morgan Stanley also noted that important risks to its forecast come from much faster demand decline than modeled. Also, in the near term, the return of Iran, the response of shale, COVID restrictions, and the state of the global economy are key factors.