One of the world’s top energy market analysts shot down predictions of an impending “peak demand” scenario in global crude oil markets during a mid-December interview on “Bloomberg Surveillance.”

The segment saw hosts Tom Keene, Lisa Abramowicz and Jonathan Ferro query Christyan Malek, managing director and global head of energy strategy for JP Morgan, about his bullish outlook for oil in 2024 and beyond. Keene opened the discussion by recalling Malek’s 2021 assessment that emerging markets would push crude demand—and prices—higher, and asked Malek if that remained the case.

“If anything, I think it’s strengthened,” he replied. “There is demand in the world that we just simply cannot see.”

Malek went on to describe how emerging markets’ oil consumption would expand as those economies added everything from streetlights to modern transportation. “That intrinsic demand that is not visible is so significant that we don’t see demand peaking,” he conveyed. “I don’t think we will see demand peaking in our lifetimes, particularly as emerging market demand growth continues to surprise to the upside.”

Abramowicz noted that Malek’s view contrasted with predictions that oil demand was on the verge of peaking and pointed out that U.S. crude production was setting records.

Malek praised U.S. producers for adding output through unconventional plays, but argued that new American production would fall far short of matching millions of barrels in new demand. “There is no massive volume that we don’t know about that is coming into the market in the next two-three years,” he said. “That ultimately means (the question is a matter of) not if, but when, does the market tighten.”

One of the strongest signals of a tightening market will be a move by Saudi Arabia to increase oil sales, Malek suggested. “That’s not a negative (signal), that’s a positive,” he maintained.

Marginal Cost

Many forecasters began 2023 with bullish views on the oil market only to see prices drop, Abramowicz recounted. “Why are people so confused by what is going on in crude?” she posed.

According to Malek, those forecasts failed to fully account for black or gray market barrels from countries such as Russia, Iran, Venezuela and Libya.

“That is exactly why this time last year (JP Morgan was) bearish—despite our super-cycle call—into the first half of (2023) simply because there was a lot of volume that we just could not see,” he related.

A second source of volatility was the risk premium associated with the Middle Eastern conflict that began in October, he continued. “There were concerns around the potential widening of that conflict that could create a bid to the upside,” Malek said. “I don’t think that premium has gone away, but it is something we need to keep an eye on.”

Meanwhile, he emphasized, although claims about market surpluses or deficits may be malleable to forecasters’ preferences, a more important metric is far less compliant. “The reality is that you cannot change the marginal cost of oil. That has gone up; it has gone up significantly,” Malek attested. “If the marginal cost of oil is going up, it is more expensive to produce whether it is because of cash return for the majors or supply chain bottlenecks.”

Malek suggested crude’s price floor was about $70. Although 2024 prices may swing significantly, he assessed, they probably will do so within a $70-$90 range. “It will be volatile, but let’s not forget that the marginal cost of oil is going up,” he held. “That typically is the early leading indicator of an upside.”

Through The Decade

When Ferro asked about Malek’s prediction that strong oil prices would extend beyond 2024, Malek again pointed to fundamentals. “There is no significant volume of oil coming to the market in the rest of the decade,” he pointed out. “There is no major quantity—not like the North Sea in the 1980s, not like shale in the last 10-12 years. With that in mind, it is just a matter of time before the market significantly tightens.”

Moreover, those who suggest that OPEC’s production cuts will prove as ineffective as they were in the 1980s may be missing the cartel’s goal, Malek argues. Instead of describing the cuts as an attempt to shore up prices, he likened them to one of Sun Tzu’s famous military tactics. “It is almost like The Art of War; they are retreating in order to advance,” he compared. “They are going to take a share of demand growth in the future when all the big volume out there has diminished.”

Non-OPEC output still may grow, Malek added, “but not in the millions of barrels that we need to meet future demand growth, which is at least going to be between 107 million barrels and 108 million—if not higher—by 2030.”

Malek characterized consolidation in the U.S. oil and gas industry as another bullish signal. Faced with the challenge of significantly increasing production, he said, companies were looking to apply their strategies and approaches to newly acquired properties.

“This is definitely a narrative of efficiency . . . but it is a double-edged sword,” Malek assessed. “It is telling you that they do not have it themselves in their own portfolios, they have sort of maxed out on productivity—which is clearly bullish. But equally that means there is more wood to chop than what they bought in terms of the acreage to raise the productivity to the standard they are on.”

Although U.S. shale production probably will prevent world oil prices from ascending to $150 a barrel, Malek predicted, it will not be enough to restrain a bullish market. “These deals are telling you that, beyond 2025-2026, we now are seeing a significant reduction in new inventory that can hit the market,” he concluded. “We will see additional volume, but not significantly.”