Oil’s twilight: one investor’s view on how it plays out

THE GLOBAL oil industry’s foundation of ever-expanding demand will probably crumble and that may hurt profits sooner than expected, according to a London fund manager.

The sector faces stagnating demand within seven to 10 years, and that means it may lose the ability to bring itself back into balance when oil prices drop, says Nick Stansbury, who helps oversee $1.3 trillion (R18.25trln) at Legal & General Investment Management as head of commodities research.

The fact that the industry may face much lower growth rates soon is something management needs to address now, because the slower pace of rising demand may not be enough to spur crude prices that justify projects with decade-long investment cycles, he said. In the past, oil-price slumps have stimulated demand increases as consumers have taken advantage of lower costs. Meanwhile, longer-term growth in the global economy and population rises have continued to push crude consumption higher.

Now the sector could lose its ability to recover from price slumps entirely as global oil demand peaks, which is expected in the 2030s, and it could even be sooner.

“What matters is when the demand hits a plateau, not the absolute peak year,” Stansbury said. “It’s really hard to argue it’s not a near-term problem.”

Even oil major BP’s own forecasts show oil demand growth drops to about 0.5 percent a year after 2025, compared with 1.3 percent now, as electric vehicles become more popular and energy efficiency improves. Stansbury argues it’s that lower pace which might not be enough to drag crude prices back up after a fall.

Companies should soon be ready to prioritise returning cash to investors rather than over-spending on new oil and gas projects or trying to develop renewable-energy businesses, he said.

“Within the next 10 years, we’re going into a window of uncertainty.”

Legal & General is asking energy companies to “very clearly articulate how your capital allocation is robust”.

The electrification of the world’s energy system means different parts of the oil industry will begin competing with each other to supply a decreasing pool of customers amid potentially low prices, Stansbury said.

The shift will be a big deal for global markets, because the energy industry has been built with more than $10trln of investor capital and the sector provides a fifth of every dollar paid as FTSE 100 dividends. In 2017 alone, oil and gas investment amounted to $716 billion, according to the International Energy Agency.

“Climate change within energy investment is becoming a key focus for fund managers,” Stansbury said.