Global oil demand is on pace to rise by about 2.4 million barrels per day (mb/d) this year to an average of 102.3 mb/d. That would set a new record for demand. Most oil market experts expect oil demand to continue rising in the coming years.
However, there's a lot of debate about how much fuel remains in the tank. That's clear from divergent demand predictions by the International Energy Agency (IEA) and OPEC. Here's a closer look at their oil market forecasts and the implications for oil stocks.
The end is near
The IEA recently released its medium-term outlook for the oil market based on current government policies and market trends. Overall, the IEA sees oil demand rising by 6% from 2022's level by 2028, when it will reach 105.7 mb/d. Fueling that growth is strong demand from the petrochemical and aviation sectors.
However, it's far from a bullish forecast. The IEA wrote, "Despite this cumulative increase, annual demand growth is expected to shrivel from 2.4 mb/d this year to just 0.4 mb/d in 2028, putting a peak in demand in sight." The IEA noted oil's usage as a transportation fuel would start declining after 2026, powered by the expansion of electric vehicles, biofuel growth, and increased fuel economy.
That outlook led IEA Executive Director Fatih Birol to warn oil companies that they must pay attention to what's happening in the energy market. Birol stated: "The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency and other technologies advance. Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition."
Still growing strong
OPEC also recently released its oil market outlook. The group of oil-producing nations expects oil demand to increase to 110 mb/d by 2045, while overall energy demand will rise 23%. OPEC estimates that oil will account for 29% of the global energy mix by 2045. While the group acknowledges that renewable energy will play a greater role in meeting overall energy demand, it firmly believes that "oil remains an integral part of the mix."
OPEC's prediction means the world will need over four mb/d more than the IEA's forecast over the next 20 years to meet demand. That has enormous investment implications. If it's right, oil companies must continue investing in growing their oil output for at least the next two decades to keep up with demand. Failure to do so would result in undersupply and, in OPEC's view, cause "energy chaos" from sharply higher oil prices.
Navigating the uncertainty
The uncertain future of the oil market poses a big challenge for oil companies. They need to decide whether to continue investing in oil projects or ramp up their spending on clean energy. If they shift too soon, the economy might not have the oil it needs in the future. If they pivot too slowly, they might go extinct.
Most U.S. oil companies are trying to toe the line between the two viewpoints. While they're spending most of their capital on growing their oil businesses, they're also investing some money into cleaner alternatives.
For example, Chevron (CVX 0.37%) recently agreed to buy oil and gas producer PDC Energy for $7.6 billion. The deal will bolster its oil equivalent reserves by 10%. In addition, the company plans to spend $14 billion to $16 billion per year on capex. Most of that money will go toward sustaining and growing its legacy businesses. However, Chevron plans to invest a total of $10 billion through 2028 on lower-carbon energy. That includes $1 billion annually to increase its renewable fuels production capacity following its $3.2 billion deal to buy Renewable Energy Group last year.
Meanwhile, Devon Energy (DVN 0.19%) plans to invest $3.6 billion to $3.8 billion of total capital this year. Most of that money is going toward expanding its oil and gas production. However, Devon is investing some capital to reduce its greenhouse gas emissions. In addition, the company made a small $10 million strategic investment in a next-generation geothermal energy company.
Navigating a challenging landscape
The biggest uncertainty facing oil companies is future oil demand. The IEA believes demand will peak in a few years, while OPEC anticipates it will keep growing for a couple more decades. These divergent views make it challenging for oil companies to plan. Most are taking a middle-of-the-road approach by continuing to invest in growing their oil output while also investing some capital into cleaner alternatives. They hope their more balanced strategy is the right one. Only time will tell if they're correct.
However, while there's significant long-term uncertainty, most forecasters agree we'll need more oil in the near term. That suggests oil stocks should have a few more good years left.
