Pierre Andurand, the world's best known oil trader these days, believes that the market is underestimating the scale of the demand boost from the end of covid lockdowns. Oilprice.com notes that Andurand sees the possibility of crude oil demand growing by more than 4 million barrels per day (mbpd) this year—a 4% increase over last year. “I think oil will go upwards of $140 a barrel once Asia fully reopens, assuming there will be no more lockdowns," Andurand said.
This is quite an assertion, and as OilPrice notes, far exceeds the demand growth forecasts of other analysts. How well founded is Andurand's assertion?
There are many ways to create oil forecasts. One of these relies on long-term trends.
Oil is a kind of utility for the global economy, that is, oil consumption tends to rise at a fairly steady pace from year to year with GDP. At times, consumption grows faster than trend, but then a recession comes along and resets oil consumption to a lower level. From there, demand tends to climb back to its long-term trend. Indeed, if we project out a simple linear trend based on the years from 1997 to 2003, that is, before the rise of China and the subsequent 'peak oil' period, we can still predict with considerable confidence oil consumption twenty years later. Consumption tends to return to its long-term trend
At present, we are off trend, and by quite a bit, due to the covid pandemic and the resulting lockdowns. Compared to the '97-'03 trendline, consumption was 3.3 mbpd below expectations in 2022 and falls 3.4 mbpd below trend in 2023 compared to the EIA’s latest forecast. To return to trend, consumption would have to grow 4.5% in 2023, just as Andurand contends.
Source: EIA, Prienga analysis
But the numbers may prove even more dramatic. The '97 trend line does not fully consider the rise of China, which materially began to drive oil consumption growth from 2003, leading consumption to rise above the '97-'03 trend line during the 2004-2008 period. This growth was reversed by the Great Recession and constrained by an oil supply unable to keep up with demand until mid-2014. In August 2014, however, explosive US shale oil growth allowed supply to catch up to demand and cratered oil prices. This allowed consumption to regain the 2003-2008 trendline which captures the rise of China. In the three years before the pandemic, therefore, oil consumption was indeed on the trendline incorporating China's rise with no sign of an overheated oil market or an unsustainable trend in consumption. Therefore, but for the pandemic, we would have expected world oil consumption at 105.8 mbpd in 2023, a full 5.3 mbpd above the EIA's current forecast for the year.
If long-term trends are the right approach to thinking about the future, then even Andurand's aggressive forecast may prove too tame. The upside surprise could be as much as 6 mbpd.
Timing matters. Returning to trend requires the material recovery of China's economy. This may be expected in 2023, but politics in Beijing look fraught. A scary China may be a slower-growing China. Further, the reversal of pandemic fiscal and monetary stimulus is expected to bring recession across much of the world. And finally, the Russo-Ukrainian war throws a wrench into all predictions. How and when the world returns to a pre-pandemic, pre-war normalcy is hard to know. The long-term trends do, however, suggest it happens eventually.
When it does, Andurand is likely to prove right and demand growth will exceed all expectations. In such an event, a price forecast of $140 / barrel is by no means out of the question, and I would not be surprised if oil peaked, at least for a time, above $180 / barrel.