Oil Price Volatility: Recession Fears and OPEC+ Surprise
After averaging around $US 75/B over the past few years, the WTI oil price fell below $US 60/B in early May. The weakness is driven by growing concerns about a potential recession resulting from US tariffs and announcements from the OPEC+ group that they will accelerate adding supply to the market, just as demand may be softening.
To help us understand the recent volatility in oil prices, our guest this week is Jeremy Irwin, Global Crude Lead at Energy Aspects.
Here are some of the questions Peter and Jackie asked Jeremy: Is this a repeat of 2015, when OPEC decided to flood the market to weaken US shale oil producers? Is President Trump influencing the OPEC+ strategy, as he may want lower oil prices to help offset the inflationary effects of US tariffs? At current price levels, how will US oil production respond? If profit is tight at lower prices, will US oil producers prioritize paying shareholders or capital spending? How might changes to US sanctions on Venezuela, Russia, and Iran impact the oil market? When do you expect global (and China’s) oil demand to peak? In the short term, how serious is the threat of recession to oil demand? Do you expect Canadian oil export infrastructure to expand?
Content referenced in this podcast:
- See the Energy Aspects website to learn more about their research data, tools, and consulting services
Please review our disclaimer at: https://www.arcenergyinstitute.com/disclaimer/
Check us out on social media:
X (Twitter): @arcenergyinst
LinkedIn: @ARC Energy Research Institute
Subscribe to ARC Energy Ideas Podcast
Apple Podcasts
Amazon Music
Spotify
Episode 284 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back. Well, in the spirit of timestamping things, because things change so quickly, it is the afternoon of Monday, the May the 12th. We are waiting for cabinet announcements tomorrow, Jackie, from Prime Minister Carney to see who’s going to be, amongst other things, our minister for Enercan, for ECCC, and finance and beyond. So that’s going to be something we can talk about in the next couple of weeks of podcasts, but it’s certainly not today, because we don’t know yet. But what we do know is that there’s also been this morning a temporary relaxation of the China tariffs. China and the United States are back in negotiations. That news has led to a significant bounce in the equity markets and indeed the crude oil markets. So what better time to bring on a guest to talk about crude oil?
Jackie Forrest:
Yeah, for sure. WTI, we’d like to talk WTI. It’s 62 bucks versus $57 at the beginning of May with this 90 day reprieve of the tariffs on China. But we’re very happy today to have our guest, Jeremy Irwin, global crude oil lead at Energy Aspects help us understand not only the most recent changes, but everything that’s going on in crude oil markets, including what is OPEC doing. So Jeremy, welcome to the show.
Jeremy Irwin:
Yeah, thank you very much for having me, Peter, Jackie. I mean, a longtime listener and thanks for the opportunity to join you guys, and share our views on oil markets.
Jackie Forrest:
Okay, Jeremy, and people may say you’re out of London, I don’t know if we said that, but you’re listening to our podcast and it’s because you have a background coming from Alberta. So tell us a little bit about yourself.
Jeremy Irwin:
Yeah, born and raised in Calgary. Completed the applied energy economics program at U of C. Spent about four years on the marketing group for a Canadian midstream company. I shifted over focusing on Canadian crude for a global commodity shop in Calgary for about four years and went over to Geneva to finish a master’s in commodity trading, and ended up in London here with Energy Aspects. So Canada is still fond, it still feels like home, but the scope of what I pay attention to is a little bit broader nowadays.
Peter Tertzakian:
Yeah, wonderful. Well, let’s talk about the current situation. So we talked about the oil price having fallen to $57 on the double whammy of potential recession, sort of like peak chaos with all this trade war and tariffs that are radiating out of the United States, and then also something that’s sort of like deja vu with Saudi Arabia and OPEC+ opening the valves again, bringing more supply onto the market at a time when demand was perceived to be weakening, indeed another million barrels a day by the time you’d add up all the different tranches of new oil coming to market from OPEC+. So are we in the midst of another price war or maybe just characterize the situation as you see it, both on the supply and demand side?
Jeremy Irwin:
Yeah, I mean, we’re certainly getting this question a lot here at Energy Aspects. I think the short answer in our view is no, but let me just unpack that for a moment. We’ve had OPEC+ committed to adding stability to the market for a long time. And now, Peter, as you said, we’re looking at some tariff induced demand weakness and the balances of global fundamentals have been a little bit shaky on the back of that. So I think the real question is, why is now the right time in OPEC’s eyes to bring back additional supply?
And Saudi by and large has done a fantastic job over the last two years, and OPEC+ as an extension of pulling down inventories globally to quite low levels we’re at. And you’ve also had these compliance issues that have been growing within the group with certain member states starting to produce above quota, and that’s been gaining more market traction and really driving headlines. But in the here and now, we’re going into Q3, which is seasonally a strong period for demand with very low oil inventories. And in order to calm some of those compliance issues and with an outlook for the near term fundamentals looking quite supportive, those are the two major reasons we see OPEC+ deciding to bring back additional supply or unwind those voluntary production cuts that have been in place since say November of ’23.
Jackie Forrest:
Right. Well, and Saudi’s been holding back on the OPEC group, you say since ’22 some of these cuts actually. In fact, they cut a lot during the period of COVID, and then there was a period where they got their barrels back on the market, but it was pretty short-lived during the Russian invasion of Ukraine. And they’ve really been sitting on all of these spare capacity, I think it’s officially measured at something like six million barrels a day of spare capacity. What they’re trying to get back into the market was called the sweetener, I think at first, right? Or a lollipop. Like, Saudi was just going to add it for a short time, and that was like two years ago.
And meanwhile, they’ve been sort of flat in terms of their production as a group and non-OPEC led by the United States has been growing. So I look at this and think, “Well, is this a change of strategy here?” In that the last five years has not been great for this strategy if you look at market share. It has been good in terms of revenue, because all things the same, the price of oil wouldn’t have been 70 to $80 over the last two or three years if they hadn’t been constraining their production. Is there any chance that this is a broader long-term strategy versus a short-term thing, just to bring into compliance some of these cheaters? And by the way, Jeremy, I did look it up. The cheaters altogether are over a million barrels a day of production. So meanwhile, Saudi Arabia is sitting here making these voluntary cuts of a million, just so that other people can take their market share even from their own group.
Jeremy Irwin:
Yeah, I think the burden has not been equitably shared across the members, and Saudi has shouldered more of that burden over the prior two years. And I think part of this is coming from Saudi saying, “Hey, we no longer want to pick up this tab. We want to optimize our revenue and if we can’t get prices to perform, we’ll do it with quantities.”
But in large soundings from OPEC, and I’ve had the chance to go to Saudi and speak, and present to them, and they see it as a longer game, I think than a lot of people that focus on US shale. I think they’ve been very patient with US shale and we can get into our views around US shale being the engine of non-OPEC supply growth slowing, which is more structural in our view, but we still think they’re playing the long game and they’ve secured long-term agreements with Asian refiners, and they kind of view that as long-term market share that they’ve captured. And even with the accelerated unwinds, we’ve seen more favorable OSPs pricing to Asia. It doesn’t really look like they’re trying to capture WTI market share in Europe with the accelerated unwind. And just because the quotas are being unwound, as you mentioned, Jackie, a lot of that production has already been on the market. They’ve already been overproducing, so it’s not the actual amount of physical molecules being returned is as severe as say the quotas might indicate.
Peter Tertzakian:
Right. So it’s in the accounting. So you’ve already talked about US shale oil supply. We’re going to come to that later on in the discussion, because it’s really quite important in terms of the longer term here and what price does oil come out of the ground or not, but speak to some of the social media chatter even in the headline chatter, that some people say President Trump has been pushing Saudi and OPEC+ to bring on more supply to lower the price of oil to mitigate against inflationary effects of the trade war. Does that chatter have any merit?
Jeremy Irwin:
We would view that chatter as a bit more speculative. We think if there was some backroom deal done between Trump and the Saudis to lower the price of oil, we think we probably would have heard about it on Truth Social. By and large with Trump’s visit now in the region, we think a lot of those countries want to focus on some of the geopolitical tensions that exist, whether it’s the Houthis, Gaza, Iran. We think that’s the focus of what they want the discussions to focus on and we really think speculation that there’s been some type of backroom deal between Trump and the Saudis is mostly people grasping for a narrative. We don’t think that really has any traction or is legitimate in our view.
Peter Tertzakian:
There is a bit of a perception amongst the US oil producers that this sort of thing is going on and some discontent even with Trump, because lower oil prices are not conducive to the whole drill, baby, drill narrative that was touted during the election campaign and even during the immediate post inauguration period.
Jeremy Irwin:
Yeah, I mean, a lot of Trump’s statements have been a little bit contradictory. You could say the same might hold true about the saga we saw on tariffs on Canadian and Mexican crude largely in Q1 of this year. But the administration has a few levers they can pull, whether it’s leases on federal lands, whether it’s expediting the regulatory process, maybe some reduction in royalty payments, but by and large, in that open free market economy which is US oil production, price is the driver for behavior and for upstream activity. And so, it has been a little bit contradictory trying to grow these oil supplies, but also have low oil pricing. We haven’t seen as much chatter of that recently, because I think the US focus is going to pivot towards liquids and gas more so than black oil growth. And we think that trend probably continues. So the US’s ability to grow black oil is challenged for a number of reasons, which we can dive into.
Jackie Forrest:
Okay, well, let’s get into that. But I did want to say, I was thinking about President Trump, and it’s kind of funny when you go back to the last time the Saudi group decided to open up the valves. It was I think April or March of 2020 and the price of oil went down to 25 bucks, and Donald Trump was actually phoning up Saudi Arabia and Russia, and asking them, “Cut your production, because it’s going to hurt our producers.” So if he’s behind this, maybe oil producers can take a little bit of solace in the fact that maybe there’s a floor for him too, where the price gets too low for him. But let’s talk about the US. Here we are. We’re just above 60, but we were into the 50s. And what is your view on where the direction of US tight oil resource goes at the kind of price levels we’ve been seeing in the last month or so?
Jeremy Irwin:
We went into the year with about 400 a day of US production growth on average. That 400 a day has declined all the way to 50 KBD in 2025 now, and that’s largely shouldered by shale oil having challenges to both offset declines and grow production in a sub 60, sub 65 price environment even. You still have some projects coming online in the Gulf of Mexico, which are longer lead projects, slightly better economics, that capital’s been spent. That’s still adding about 150 KBD of US production growth. But we have the Permian, which is by and large the biggest shale basin declining by about a hundred KBD exit to exit in 2025 now. We’ve erased the growth we had in the Uinta and the Utica, some smaller inland basins that were emerging as marginal growth plays, accelerated declines in the Eagle Ford.
And there’s a number of reasons for that. It’s higher breakevens with inflation showing up across input costs, as well as labor. It’s the amount you need to invest to offset these declines in these shorter cycle shale basins. And it’s also the primary or tier one acreage has been consolidated so much into the hands of the majors, where we see US shale majors being a little bit more disciplined in reserving that prime acreage for a better pricing environment. And they’ve taken out so many of the private operators, which have been the historical drivers of growth when they really drive up production rate to look attractive for a takeover.
So there’s a number of reasons, and the geological reasons are more so that you’re seeing higher water cuts in these basins as you get to tier two, tier three acreage. You’re seeing higher water cuts and gas ratios as well, and all of these things are added costs. When you have to dispose and haul all that water out further and further as you get away from connectivity to disposal sites, these are additional costs that drive up those breakevens. The steel tariffs haven’t helped as well. We were just doing a recap of what we saw in Q1 earnings and collectively we’ve seen the US upstream space cut 1.8 billion in CapEx for this year already. So we’re already seeing some reaction and we think ultimately short cycle shale basins should be the balancing mechanism for this type of global imbalance that we were kind of staring down the barrel of.
Peter Tertzakian:
So let me distill what you’re saying and ask you a sort of specific question. So for those who are uninitiated in US shale plays, these have the real benefit of being very prolific. In other words, they produce a tremendous amount upfront, because of the fracturing of the rocks. So you get almost this burst of production, but a year later, say if the well comes on at a hundred units, a hundred barrels, that’s a lot more than that, typically several thousand. But if it’s a hundred, then the following year it’s down 35% to say 65, and then a third again down the following year.
So to maintain production, let alone grow, you have to keep drilling the next well and the next well, and the next well. And you’re also saying that not only is it a problem of these steep decline rates to keep up on this, what we call the treadmill is that progressively there’s more and more water produced with the oil, and the water has to be separated and hauled away, which is quite expensive. So it becomes more and more expensive to do. So my question is, whereas half a dozen years ago, maybe a little bit more, the notion was that it was economic up to 50 bucks or 55. What is the number today, given added expense, inflation, all in? What is the cutoff point, where the board of directors of an independent oil company in the United States, “You know what? We’re going to pull back on our drilling, we’re going to pull back $1.8 billion,” as you put it. What is it? Is that $65? Is it $60? What’s that notional number, where it doesn’t make sense anymore on average?
Jeremy Irwin:
Yeah, I think focusing on the Permian, which is close to six million, a little over it total, we think the new breakeven is in the mid-50s, so we think it’s around $55 for a breakeven. The second question is would you choose to bring that online in a very low margin environment or would you rather wait for that duck to be completed in a higher price environment as well?
Peter Tertzakian:
So you drill the well and you just kind of leave it there like inventory, before you complete and bring on the flow. So it’s basically storing it until the price environment is better.
Jeremy Irwin:
Yeah, that’s correct. And outside the Permian, it has the lowest breakevens in our kind of upstream economics, and then you kind of get sequentially higher as you go into some of the other inland shale basins, like the Bakken or the DJ, or whatever it might be
Peter Tertzakian:
That are now getting mature. It’s hard to believe, but I mean the North Dakota Bakken came on in I think 2009 in meaningful quantities. So here we are 16 years later, it’s all of a sudden starting to get to be a mature play.
Jeremy Irwin:
Yeah, that’s absolutely correct. I mean, we’ve seen the same thing and say in Oklahoma, there in the Anadarko, where we’ve seen kind of these gradual declines starting to come to fruition, and we’ve seen that show up in less crudes available around Cushing that were traditionally used to make WTI. So we’ve seen this show up in other places already. It’s just now that the Permian’s being challenged, and that was such the economic of US shale growth, and I think that’s the change that’s really kind of turning the corner when you talk about say, an average price for the year of WTI. I mean, our price forecast is 64, so it’s pretty marginal growth at that price in our view.
Jackie Forrest:
Right. So you’re assuming $64 and that it’s almost flat in terms of the overall US production that’s accounting for some Gulf of Mexico. Now there’s differing views out there, obviously. People have lower price levels, like maybe what we just saw, and they’re predicting more of a decline. But I find one thing that’s interesting in the different forecasts that nobody really knows, is that today I think the shale oil producers in general are giving half the money back to their investors. So if the price goes down and they say, “You know what? We’re not going to give all the money back to the investors. We’re just going to drill to maintain our production.”
Then you get a very different result in terms of how much US production declines. If you assume, “No, they’re going to maintain those shareholder payments, those are the most important thing.” Then you’re going to see the decline be much faster. And we’ve never really been through a downturn. We had the COVID, but that price was just so low you couldn’t afford to pay investors or drill. So we never really had a price level that allowed us to see what are the priorities for how they spend. So Jeremy, you’d said you’d looked over the first quarter results, and I know there’s probably not as much there, because it’s kind of new to the producers, but do you have any sense of what will be the priority?
Jeremy Irwin:
Our soundings have definitely been, there’s a priority for capital discipline and to give returns to the shareholders. So I think in the sense that, would they cut dividends to invest that capital, to keep production up? We would probably fade that notion a little bit. We’re seeing in the oil field services as well, where they’re kind of expecting lower growth rates in their business on the back of the shale slowdown. I just see them being more disciplined, and especially with it being mostly majors now that are kind of controlling the throttle, which is US shale supply, more so than in prior cycles. I think they’re probably going to lean towards discipline and keeping the investor whole. I think if you were to see them make the alternative decision, you would expect the share price to take a hit on that type of decision.
Jackie Forrest:
Yeah, I guess the alternative though is if you shrink in your production, that’s not really good long-term either, right?
Peter Tertzakian:
That’s a downward spiral. So the $1.8 billion cut is likely the growth segment. I mean, for the most part, the producer is wanting to keep their production level at a minimum, and then if there isn’t enough capital, then you have a dilemma of, okay, what are you going to cut, the dividend, the share buyback or the production investment? And typically, the production investment to sustain production is the last thing to cut, because that gets into a downward spiral. I think you’re going to see a lot less of the share buybacks, the dividends won’t be compromised, and the growth capital, the amount to actually grow the production. That’s why it’s leveling off and it’s struggling in the mid-60s, because of the reason Jeremy said. The margins are pretty thin.
Jeremy Irwin:
Yeah, and I think with the more higher gas ratios you’re seeing, liquids ratios, like we’ve seen WAHA go negative, it’s gone negative again. So I think there’s some structural challenges there to kind of really optimize the black oil, which is mostly what you’re targeting.
Peter Tertzakian:
Let’s talk about some other countries jurisdictions. Mexico. Pemex is reported to be financially strapped even before this price drop reports that they weren’t paying their bills, or backlogged in their payments and so on. What is their status and what do you see happening to Mexican output?
Jeremy Irwin:
In Mexico, we saw production decline by 200 KBD year over year in Q1 of this year. We think that trend’s largely going to continue. We’ve heard soundings that they’ve completed 8% of their targeted drill program year to date, and some of this is politically driven with them prioritizing, say more of their downstream sector as opposed to the upstream sector, trying to get less reliant on foreign imports of product from largely the US Gulf coast.
But with all that capital and those debt repayment issues ongoing, we think that Mexican production will continue to decline. And when you look at, say what the US Gulf Coast, those complex refiners rely on to optimize their refining kits, it’s a lot of sours from Mexico, as well as you know now you’ve lost Venezuelan heavy, and you really need that longer rigid barrel to fill up those secondary units that those complex US Gulf Coast refiners rely on to make an improved margin relative to say, as a simple refinery. So it stresses the USGC complex refiners to look for alternatives. We’ve seen more Basra heavy pointing into the US Gulf coast recently as a partial replacement per se, for Venezuelan and declining Mayans.
Peter Tertzakian:
That’s from Iraq, right? That’s from Iraq?
Jeremy Irwin:
Yeah, that’s correct.
Peter Tertzakian:
This speaks well to Canadian heavies, doesn’t it?
Jeremy Irwin:
Certainly. Yeah. I think Canadian heavies are in an advantageous spot here, with a lot of the downstream additions we’re seeing globally in the east. They’re tailored to run mediums and heavies. So the Canadian heavy barrel fits that incremental downstream demand quite well, and we hear that from Asia quite often. “How do we get more Canadian heavies? How do we get access to it?”
Jackie Forrest:
Okay, well, this brings us to, it always comes back to United States and Donald Trump, but there are potential for changes to the oil markets, both upside or downside, depending on what he does in some of these countries. You mentioned Venezuela, the sanctions on Venezuela are constraining their production, as well as I guess lack of investment in the country. But we’ve also got news headlines this weekend around potential deals with Russia and Iran that could add more barrels back to the market. So how impactful could that be? Could we have a situation where there’s more downside, because suddenly just as of this weekend, it seems more likely that some of these barrels come back to the market?
Jeremy Irwin:
Maybe I’ll just take them in order. In Russia, we’ve always said that it’s been their adherence to OPEC+ policy that’s restricted their output into global markets. I think the US sanctions were designed to damage Putin’s revenues, but not take their supply off the global market. So if you get any type of relaxation in US sanctions against Russia, due to some peace negotiations around Russia, Ukraine, we don’t think that adds outright supply from Russia on the global market. They’ll add supply as OPEC unwinds the voluntary cuts. On Venezuela, I think the threat from Trump that any country that’s seen running or purchasing Venezuelan crude would be subject to 25% tariff has actually been quite effective. We’ve seen all the majors that had waivers to process it, whether that be Repsol, Eni, Reliance, and as well as Chevron in the US, they’ve all stepped away and they’re looking for alternatives.
So that really kind of puts the onus on mostly China and the teapots to run more of the Venezuelan heavy. But we have Venezuelan production coming off by about 200,000 barrels a day this year, and the wild card on sanctions, and probably the most meaningful one is certainly Iran. Under Trump 1.0, the maximum pressure campaign that Trump kind of put forward got those Iranian exports as low as 400,000 barrels a day. Then when a blind eye was largely turned by the Biden administration, we saw those exports creep up to close to two million barrels a day, certain months. Now they’re hovering kind of around 1.7, 1.8 right now, and we think those will come down to about a million a day by year-end, because we are anticipating a maximum pressure campaign by the US administration with increased or tightening of sanctions on Iran to take some of those barrels out of the global market. So that’s in our global balances currently for the back half of this year.
Jackie Forrest:
Right, but it seems like, who knows what happens. There’s the potential even for a deal, and then those barrels may come back, right?
Jeremy Irwin:
Yeah, I think what our geopol team has been saying is that it’s sort of a hard line, where the US administration doesn’t want them to have uranium enrichment capacities, and there’s been some posturing saying they’re making some progress, but when we review the meeting notes, it seems like those red lines haven’t really budged. So I think our view would still be that a deal with Iran and US is unlikely in our view, and that’s why we have that supply coming out of the market, at least in our balances.
Peter Tertzakian:
But let’s move on to the demand side, because there’s interesting things going on there as well. Let’s talk about China, because certainly in the 2000s it was just roaring in terms of its oil demand growth. Its GDP was growing by five to 10% a year, and then in the 2010s it started to decelerate a little bit. They got more efficient in their use of their oil, they started to diversify into renewables, and now in the last half dozen years, much more electric vehicles and so on. Certainly the elasticity, in other words, the sensitivity of their oil consumption to their economic growth or lack of growth, depending upon the cycle that we’re in, has decelerated. Can you talk about China and where we’re at? Because I mean, it was just one of the biggest, what you say, drivers of the demand side and the biggest drivers of therefore price appreciation over the course of the last 20 years.
Jeremy Irwin:
Yeah. So we completely agree, where we’ve seen that decoupling of Chinese oil demand growth and GDP growth really since COVID. We think Chinese diesel demand has probably already peaked. We think gasoline demand probably peaks this year. We’ve seen a big ramp up in their EV adoption. We’ve seen things like LNG trucking that’s weighed more on their demand for distillate. But by and large, we don’t think China will be this engine of oil demand growth go forward, and they have to pass the baton to smaller countries that can incrementally contribute, but not at the same outright size as China.
So we would point to India as probably the next biggest driver of growth, but you also see some smaller contributions from LATAM or Latin America, Africa. You’re seeing the Middle East region grow kind of marginally all fuel types. Growth is slowing, but the outright demand is still grinding higher. So I think China’s somewhat turned the corner. It’s not going to be that demand growth center any longer. And with gasoline demand probably peaking this year, yes, sure, jet and petrochemical demand can continue, but your prime major transportation fuel demand, that growth is over in our view.
Jackie Forrest:
Okay. I want to come back to the short term because short term there’s the potential for a recession. But since we’re on this topic, considering all that, do you think that oil demand peaks? And if so, when? On the global level.
Jeremy Irwin:
Yeah, we have it in 2032, where we see global oil demand peaking and thereafter, we see it as sort of a long tail. We don’t see it dramatically declining thereafter, but that’s where we see the peak occurring, slow down in your more OECD countries, that’s already well underway. And once you kind of have that surge in growth from some of more of these developing countries, and we’d expect their transition period to be tighter or quicker than what we’ve seen historically, with just advancements in technology and there being a bit of a roadmap for that. Now, 2032 is kind of where we have it penciled for where it peaks.
Jackie Forrest:
Well, I like the precise number. One follow up question on that is, it seems in the last 12 to 18 months, there has been a growing recognition that some of these clean energy technologies are going to roll out more slowly, like electric cars are not going to maybe grow at the rate people thought. The US is really stepping back in terms of probably not requiring electric vehicles at the same rate as they thought before. But on the other hand, they’re growing a lot in China. So would you revise this outlook based on this sort of softening in terms of environmental policy that we’ve seen in the last 12 months?
Jeremy Irwin:
I think what our view in say, ex-China’s predicated on say, how quickly EV adoption can occur is really the state of those grids. And we really think that is kind of a longer lead need, that you need that proper infrastructure in order to enable the type of adoption we’ve seen in China. I don’t think any soundings from the demand team that they’re looking at sort of delaying our peak number.
Jackie Forrest:
Okay. Well, we’ve been talking about the very long-term, but I think what’s on a lot of people’s minds listening to the podcast is what’s going to happen in the next year? We see a long-term trend where oil demand kind of grows steady, but recessions or even depressions cause a short-term decline, like we saw with the COVID pandemic or other recessions. So I know Energy Aspects made some headlines right after the Liberation Day tariffs, saying that if they all went into effect, there would be potentially a million barrel a day drop in demand. Of course, lots has changed, and even over the weekend now, we suddenly are seeing the Chinese tariffs being a lot smaller. What’s your view now in terms of the potential for oil demand and how have you revised that compared to maybe earlier in the year before all this tariff news?
Jeremy Irwin:
Yeah, so right now we’re at about 800,000 barrels a day of oil demand growth this year. It has gone from starting the year about at a million barrels a day, a little bit below consensus, because our view is always that tariffs were real and they were going to have some impact, and we think that’s held true with just how long Trump has been hammering on tariffs for. That million a day got watered down to about 700,000 barrels a day when we saw the US-Chinese tariffs really escalate to embargo levels. Then it further got reduced to 500,000 barrels a day when we saw the tariff board get rolled out at the White House in early April and really saw some of those higher than expected percentages. But now with the larger than expected Chinese stimulus and the 90-day pause, we’re back to about 800,000 barrels a day of oil demand growth. And that’s slightly lower than what we’ve heard kind of across our soundings.
Jackie Forrest:
Sounds like you guys have been very busy revising your numbers. It’s like four revisions since April 2nd.
Jeremy Irwin:
Yeah, I feel terrible for our demand team this year. A lot of work.
Peter Tertzakian:
Well, let me drag you back into the long term. From your international perch, I want to ask you about the Paris Agreement, because you’re a lot closer to Paris than we are from your London perch. So in just over six months, we’re going to celebrate the 10-year anniversary of the Paris Agreement. What are you hearing from your international perch, or what are you sensing as it relates to the Paris Agreement, the net-zero by 2050, all that kind of stuff?
Jeremy Irwin:
Yeah, Peter, what I could say is in our conversations over say the trailing 16 months, it has rarely come up. Whereas prior to that, it sounded like it was a topic of discussion in most meetings. So I just feel like the market’s attention on it has probably diminished slightly. Does some of this have to do with Trump’s agenda and what he’s pushing forward? Maybe, but I really couldn’t add too much more insight on that topic. I just feel like it hasn’t come up in meetings and we haven’t had as much focus on it over the last year, year and a half. I think these pendulums tend to swing back and forth, and maybe currently we’re at one of the extremes where it’s not as topical or as focused.
Peter Tertzakian:
Yeah, I mean, I think it’s certainly between trade wars and hot wars, military conflicts, I mean, it’s certainly taken a backseat.
Jackie Forrest:
Well, let’s talk about Canada some more. As you know, we have a new prime minister, I’m sure you’re not so far away from Canada that you haven’t followed all the news around that, and he’s talking about expanding our energy infrastructure. But as you know, it’s been very difficult in Canada to get any of this done. Now, what do you think global energy traders and investors are thinking? Do they really think Canada is going to do it this time, or is there a lot of wait and see until it’s actually done? What’s the scuttlebutt?
Jeremy Irwin:
I think there’s definitely demand for the barrel. We hear about it from both a reliability of supply and quality perspective. I think Canadian crude is looked at quite favorably. Of course, global traders will always be there to participate in making those markets and taking some margin. And I’d say we’ve seen that in the Pacific ever since the Transmountain expansion came online. There’s also demand for things like LPG. You want more in Asia, especially Korea and Japan voice that quite a bit, but I don’t think anyone internationally is willing to be too bullish on Canada’s ability to grow outright production. We think we can achieve one to 200 KBD of growth for ’25 and into ’26, and then if you get the additional 150 a day of a mainline expansion, that growth has a little bit more runway. So I think there’s optimism on the demand side, but maybe not on the supply side that you’re really going to see a meaningful amount of Canadian growth occur just in this environment.
Peter Tertzakian:
Well, great. So we’ve been talking with Jeremy Irwin. He’s the crude oil lead for Energy Aspects out of London. We’ve discussed all sorts of things in the weeds of supply and demand for oil markets, or maybe I should say, the pipes of oil markets. So above all, Jeremy, it’s great to see some Calgary talent rise onto an international stage. So we’re really grateful that you were able to join us from London, and good luck with all the work that you do. I know it’s a challenging and chaotic environment, but thanks for being with us.
Jeremy Irwin:
Well, I really appreciate the opportunity and I’ll continue to tune in. And Energy Aspects might be opening up an office in Calgary soon, so hopefully that comes to fruition and all the best this year.
Peter Tertzakian:
Wonderful.
Jackie Forrest:
Okay. And we will put a link to Energy Aspects websites. You guys do some great research that people can look into, how they can become members and get access to that. So thank you to our listeners as well. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
For more ideas and insights, visit arcenergyinstitute.com.
