One thing to start: Oil prices soared yesterday after the Energy Information Administration reported a big crude stock draw in the US and rise in fuel demand, and the International Energy Agency lifted its forecast for global consumption this year.

Welcome back to Energy Source. Despite the short-term market optimism, predictions of peak oil demand continue to grow nearer.

A new report by Wood Mackenzie reckons there are just two years of rising consumption left if Paris climate agreement commitments are taken seriously. That is the subject of our first note.

Our second is on private equity in shale — and the counterintuitive view of some big asset managers that as the sector “gets religion” over environment, social and governance matters, a longer-term opportunity is arising for investors.

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On the face of it, no, according to a new report. A dire scenario awaits the global oil industry if the world starts to slash carbon emissions in line with the Paris agreement’s two-degree imperative, says a new report from Wood Mackenzie, the consultancy.

A rapid shift to electric vehicles and far higher rates of plastic recycling would cut demand. Under the consultancy’s new two-degree scenario, crude demand never recovers to pre-pandemic levels and enters into a tailspin after 2023. By 2050, the world is burning just 35m barrels a day of oil, about a third of the 2019 peak.

The drop in demand sends prices into “terminal decline”. Consumption would be falling faster than Opec could cut supplies and after 2030 there would no longer be any need for companies to find new supply — the raison d'être for wildcatters for more than a century. By the 2030s prices would likely hover around $40 a barrel, falling to less than $20/b by the 2040s.

Line chart of Global oil demand by scenario, annual bn tonnes of oil equivalent showing Oil

WoodMac’s bearish report is a reality check for crude’s future against a backdrop of wider market optimism one year on from last April’s chaos, as many other indicators point to a strong, sustained comeback for global oil — at least in the near-term.

Brent crude, the international oil marker, has risen almost 80 per cent since November as economies emerge from lockdown and a return to some form of normality edges closer.

The International Energy Agency yesterday ratcheted up its expectations for global oil demand growth this year by 230,000 barrels a day, citing “decidedly stronger” fundamentals in crude markets. It now expects consumption to rise by 5.7m b/d in 2021 to 96.7m b/d.

That came a day after Opec boosted its own consumption outlook by 190,000 b/d, predicting growth just shy of 6m b/d this year.

Analysts at leading banks have also been making bullish noises about oil continuing along its upward trajectory in the near term. Goldman Sachs dismissed a recent stutter as a “transient pullback in a larger oil price rally”.

Morgan Stanley, meanwhile, said it anticipated falling inventories and rising movement of people would continue to support rallying prices — though it cautioned that this could be tempered by the return of Iranian exports and rising activity in the US shale patch.

Oil bulls may take solace in WoodMac’s caveat that the world getting anywhere near the two-degree track remains a big if.

(Justin Jacobs and Myles McCormick)

We reported this morning about the private equity exodus in the shale patch — an important trend given how crucial private cash was to the sector’s expansion in recent years.

“LPs don’t think it’s investable,” said Wil VanLoh, head of Quantum Energy Partners, one of US oil and gas’s most prominent investors in recent years. The “it” is the shale sector. And LPs are limited partners, the investors that pour money into private equity funds and expect a return that makes the lock-up period, which can be as much as seven years, worth their while.

Yet as Adam Waterous, head of Waterous Energy Fund, another energy-focused PE firm, said, between 2015 and 2019, returns were often as little as 2-3 per cent a year — “horrendously bad.” LPs would have been better ploughing their money into an ETF tracking the S&P 500, which rose by 50 per cent in that period. Or Tesla.

The data show how the PE shale story is drawing to a close — less money coming in and less money exiting.

US private equity is ditching shale

But is there still an opportunity for the long-term PE shale investor? VanLoh, whose QEP backed DoublePoint Energy and did very well when Pioneer Natural Resources splurged $6.4bn on it earlier this month, reckons so.

First, the sector needs to stick with its capital discipline pledges. Then it needs to clean up its act on emissions, thereby satisfying the ESG demands of long-only funds and other investors — some of which have fled to greener pastures.

“We’re huge on this ESG bandwagon,” said VanLoh. “The oil and gas industry is getting religion around ESG.”

Over the next five years, he said, there will be “remarkable change” as the sector embraces ESG and deals with scope 1 and 2 emissions (the pollution from its own operations and power providers respectively), while also starting to generate high returns.

Ben Dell, managing director at Kimmeridge, another PE fund that is investing in shale while others flee, agrees that ESG now offers an opportunity.

“We want to invest in the high-return opportunities that are associated with taking the upstream E&P business down to a net-zero position on emissions,” he said.

Sceptics will scoff. Shale operators might be able to deal with the emissions from operations, but they’re still selling fossil fuels. And the promises of capital discipline have been heard before.

(Justin Jacobs and Derek Brower)

The IEA, the US Energy Information Administration, and Opec have all released their monthly oil-market reports. Here is our round-up of what matters and what changed: