An existential crisis for oil supply: this is how one Rosneft executive referred to BP’s and Shell’s recent commitments to a renewable energy shift. This shift, Didier Casimiro said, would lead to much tighter oil supply while demand continues to grow. And this existential crisis has the potential to benefit companies such as Rosneft by driving prices higher. For much of this year, the focus, when it comes to oil markets, has been on demand. It was demand that made this oil industry crisis an unprecedented one. Prices have fallen before, and as a result, supply typically falls to balance the market. But now, for the first time in history, it was demand that was the bigger culprit for the oil price collapse from this spring. Demand was eviscerated by the coronavirus pandemic. Demand is what is still keeping oil prices low despite a major cut in production made by OPEC+ and by non-members of the extended oil cartel.

Demand is also one of the factors that spurred Big Oil into such swift action on renewable energy. Their plans were in the making before the crisis, but it was the crisis that gave them a major push. Now, BP and Shell both plan to reduce their oil and gas production and invest more heavily in renewables. Investors remain wary as BP’s recent stock price drop suggests, but for now, the shift appears to be inevitable and unstoppable. And it may well create a gap of supply.

“I think that to go away from your core business, which is what they are doing, somebody will need to step in . . . somebody will need to take that responsibility,” Rosneft’s Casimiro told a Financial Times event. “It is an existential threat for supply. It is an existential threat for price volatility . . . we will have a [supply] crunch, price volatility, and yes higher prices,” he added.

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It may be difficult to see so far into the future when all we hear these days is that continued fear about this oil demand is keeping prices low. Even three consecutive weekly crude oil stock draws reported by the Energy Information Administration could not help prices, because at the same time, airlines were again hogging headlines with their pleas for more government aid—and air travel accounts for a lot of fuel demand. Until air travel recovers, oil demand cannot recover to pre-pandemic levels. Meanwhile, the pandemic continues, and fear of new lockdowns is also running high, fueling the bearish sentiment. How justified this fear is, is questionable as the governments that enforced lockdowns in the spring paid for them dearly and are unlikely to risk them again unless infection numbers continue to rise, and fast. But this is the thing with this pandemic: it is possible that infection numbers will continue to rise, and fast—whether the death counts will match remains unclear. Uncertainty is the name of this game, and the whole world is playing it.

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Even though it may be hard to concentrate on supply trends right now, the massive spending cuts are a fact, and so is Big Oil’s enthusiastic foray deeper into renewables, energy storage, and EV charging. Sooner or later, this combination may well lead to a shortage of supply, even if demand is plateauing or falling.

BP has perhaps one of the most pessimistic projections for demand: in its latest Energy Outlook, the supermajor, which is on a quest to transform into an integrated energy company, said that even its most optimistic scenario saw oil demand plateauing over the next few years and then start declining steadily. Other forecasters tend to focus on short-term demand trends, but there appears to be a growing consensus that demand might not ever recover to pre-pandemic levels.

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The trouble with general conclusions like the one above is the fact they lend themselves to interpretation. For now, the dominant interpretation appears to support continued production controls. Europe is going green, China is going green, and Shell and BP—along with most of their peers—are also going green. Oil demand is bound to stay low. Yet there are a lot of emerging economies in Asia that are not going green because they can’t afford it right now—not with their economies devastated by the coronavirus. And while oil is cheap, they will take it over renewables to fuel their economic recovery.

In June, Rystad Energy predicted a deepening oil deficit, to rise from 1.5 million bpd in June to 4.6 million bpd in July. Based on what we saw in terms of price movements during that period, this did not happen. The slow pace of recovery caught everyone unawares. But there are still forecasts for tighter supply: Goldman Sachs just last month said it expected the oil deficit to hit 3 million bpd by the end of this year and push prices up. UBS also expects a shortage and higher prices.

Over the short term, Big Oil will undoubtedly take part in this price recovery. But over the longer term, as the supermajors move away from what is now their core business, they will leave more space for the national oil companies and for shale drillers. For now, with all ambitious government programs for a renewable energy shift it looks like this space may not be too large but let’s not forget about the factor of uncertainty and the abounding doubts about the success of many of these programs. OPEC, as long as it survives the current crisis, might just end up even stronger than it was before the pandemic.

By Irina Slav for Oilprice.com

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