Brad:

Welcome to The Flip Side, the podcast where we debate the forces shaping global markets. I’m Global Head of Research, Brad Rogoff, and today we’re tackling a topic that certainly fits that bill: Are we finally ready to enter a multi-year bull run for oil markets.  

Joining me is lead equity analyst for European energy, Lydia Rainforth, who has been vocal in her research that she thinks oil markets are set to tighten and oil prices will move higher – Lydia, great to have you.

Lydia:

I’m delighted we get to do this Brad, so thank you for inviting me

Brad:

Alright, let’s get into it. Oil prices matter hugely for the economy, they are an important input into transportation, into industrial activity, even into power generation and ultimately feed through to inflation expectations and the outlook for different economies. As with most markets – it’s the forces of supply and demand that help set the price, although there is also a bit of a political dynamic that has to come into play as well.

When I think about the market as it is now Lydia, it seems sensible to think that oil demand growth is slowing, short term, the world is still dealing with the impact of tariffs – and although we don’t know exactly what the outcome is going to be, it’s hard to see that being a positive for oil demand. Longer term, electric vehicles are becoming more common, and biofuels are gaining traction — so it’s not really a question of if demand will peak, but when.

Then on top of all that, we don’t seem exactly short of supply, the US has plenty of oil, backed by an administration that is encouraging drilling, and OPEC is adding barrels back at a rate quicker than anyone expected.

So, when you put it all together — slower demand growth and rising supply — it feels like prices should be heading down, not up. That’s what the futures market seems to be saying too.

So what about my entry level Economics logic here is off and makes you think oil is about to rally?

Lydia:

Brad I’m bullish because, even with everything you just mentioned—and the general view that oil prices are headed lower—the data’s telling me a different story.

The fundamentals are tightening. What we’re seeing now is something the oil market hasn’t dealt with in over a decade: spare capacity is being drawn down. That sets the stage for a scenario where prices could keep climbing for years and for each of the factors you outlined, I understand the short-term focus, but there’s a lot more going on than it initially seems, so we must dive deeper into each one.

Brad:

I like data so that is definitely your best chance at convincing me. Let’s kick things off with the demand side—feels like that’s the most important piece to get our heads around first, right?

Lydia:

Yes. After Liberation Day and the US tariff announcements, a lot of people expected global GDP growth to slow — and that makes sense. If growth drops by around 1%, we’d usually expect oil demand to fall by about 300 to 350 thousand barrels a day out of a total of 105 million barrels a day. So yes, that’s a headwind.

Brad:

And that’s a linear approach - on top of that, there’s always the chance of disruption — for instance, what if shipping between China and the US suddenly stops?

Lydia:

That’s a great point, that could knock off another 300 to 400 thousand barrels a day, so there are certainly good reasons to be cautious. But the tricky thing with demand is that it’s super unpredictable. What looks solid in theory doesn’t always play out the same way in reality.

We also have to factor in the tensions in the Middle East, which aren’t just about supply. While oil flows haven’t been hit too hard, natural gas has seen some disruptions. And because of that, a few countries in the region have had to switch to burning diesel for power instead of gas — that’s probably added around 300 to 400 thousand barrels a day to oil demand just in the last month and a half.

Brad:

Yeah, demand’s definitely hard to get a clear read on — there’s a lot of uncertainty out there.

Lydia:

You’re right, the range of demand forecasts in the market is wide - The International Energy Agency, or ‘IEA’, thinks demand is up by about 700k barrels a day this year, while OPEC is saying it’s more like 1.3 million for 2025. And for 2026, the gap between forecasts gets even bigger the further out you go.

Brad:

Honestly, I think the markets probably got it right by leaning toward weaker demand. We haven’t really seen the full impact of those U.S. tariffs yet, and the broader economy hasn’t really felt the hit either.

But you’re saying demand is still holding up — what are you seeing that makes you think it’s stronger than people expect?

Lydia:

Here’s the thing, when it comes to supply and demand models for oil, the margin of error is often bigger than the actual difference we’re trying to figure out. Especially with demand—it’s made up of billions of people doing all kinds of things: you and me filling up our cars for example, businesses running diesel generators, that sort of thing.

That’s why the real signals we look at are what we call ‘refining margins’ and ‘inventory levels’. In Q1, the models suggested inventories should’ve built by about a million barrels a day—but they didn’t build at all. So, the models were off by a full million barrels a day, which is huge!

Brad:

That does sound like a lot. Is this an anomaly in the data?

Lydia:

We’ve seen this before—it’s what’s known as the ‘missing barrels’ phenomenon. And usually, that points to stronger demand than expected.

At the end of the day, refineries are the ones using crude. And what happened after Liberation Day was pretty telling. Despite all the talk about weak demand, refining margins — the difference between the price of crude oil and the price of products that we use every day like gasoline and diesel — hit an 18-month high. That’s not something you see when demand is soft.

Brad:

Fair — but where’s all this demand actually coming from? Most markets haven’t really felt the full impact yet of the changes in global trade.

Lydia:

And that idea of ‘yet’ is a tough one to push back on — it’s almost impossible to disprove. And to be fair, there is a seasonal element to demand. Right now, we’re at the peak end of summer, what we like to call ‘driving season’.

Demand naturally dips as we head into autumn. That’s something we see every year, so it’s not unusual. The big question is whether demand will decline more than normal.

And that’s where it gets interesting - the strength in demand isn’t just coming from China anymore. China’s been the big story in oil demand growth over the past decade, but now we’re seeing growth from the Middle East, India, Southeast Asia—and even Europe’s surprised a bit on the upside.

Brad:

Yeah, that might be true for now, but there's still a lot of talk about peak demand. The energy transition is still chugging along even if the speed has slowed in some places. With China encouraging EV adoption, it feels like that market may have already hit peak oil demand for transport. And if we're starting to see a real drop in the area that has been the major source of demand growth for the next decade, it's not exactly an exciting outlook for long term demand growth.

Lydia:

I disagree here. I don’t think the world is going to hit peak oil demand this decade. If anything, peak demand will probably arrive in the middle of the next one at the earliest. You’re right though, China’s transport demand has probably peaked, and that growth engine isn’t what it used to be.

EV adoption outside of China hasn’t really lived up to what the policies were aiming for, though. To hit peak demand this decade, global economies would need to deliver more progress in EV adoption than they have so far.

That said, I also think some of the industry forecasts are underestimating how fast things are changing. As usual, the truth is probably somewhere in the middle. I think something like 1 million barrels per day of demand growth each year out to 2030 is a pretty realistic scenario.

And we’ve got to remember, moving away from oil isn’t cheap and this is why economies are not doing it as quickly as planned. Every barrel burned puts out about half a tonne of CO₂. If you price carbon at $100 a tonne, that’s like adding $50 to the cost of each barrel. When oil’s trading at $70, it’s a tough sell to argue for adding that kind of inflation to internalise the carbon cost.

I come back to the idea – the global economy just needs a lot of energy of all types right now.

Brad:

Since demand’s so up in the air, maybe we should shift to supply. If we go with your point about the error band for demand forecasts, it feels like it doesn’t matter right now compared to supply?

OPEC’s sitting on a bunch of spare capacity, US shale can ramp up pretty fast, and there’s a wave of new production coming online from places such as Brazil and Guyana. It’s starting to look like there’s just too much oil out there—and that could easily push prices down.

Lydia:

Your point on demand is a good one – the reason to be bullish is really a supply one. There’s a big shift happening in supply when you compare the next decade to the last one. Over the past ten years, North America, basically the US, was responsible for all the net supply growth. Without US shale, we wouldn’t have seen any real increase in global oil supply, which is kind of amazing when you think about it.

But now, that growth from the US is slowing. At around $70 a barrel, US shale might add only 100, maybe 200 thousand barrels a day each year at most. And if prices drop below that, production could even fall. That’s just the reality; costs have gone up, and the US is running out of what we call ‘Tier 1’ inventory - the easiest and cheapest stuff to drill.

So, if the US isn’t adding much, producers have got to find that oil somewhere else. And the thing is—no one has really had to do that for a decade. That’s a big ask, especially when new projects take years to ramp up, not months.

Brad:

Before we get into those other supply sources - what about President Trump’s ‘Drill, Baby, Drill’ approach? The US administration wants a combination of energy independence and lower prices, right?

Lydia:

They do, and I understand why. Here’s the thing, lower prices and higher production just don’t really go hand in hand—at least not without some serious incentives.

The breakeven price to drill a new well in the US has jumped from around $49 a barrel in 2020 to about $65 now. That doesn’t mean no one’s drilling, but on average, higher prices are needed to make it worthwhile.

Brad:

Producers can’t ignore the basics.

Lydia:

That’s right, so, unless there are some big industry-specific tax breaks to bring that breakeven price down, it’s hard to see a big production surge ahead. I think what US shale has done for global supply is amazing—but we’ve got to be realistic about where things are now.

And that brings us to non-OPEC supply. We’re expecting around 600 to 700 thousand barrels a day of new supply in 2026, but that pace starts to slow from 2027 through 2030 as the industry keeps battling natural decline rates.

For now OPEC has enough spare capacity to handle disruptions. That’s why we didn’t see a huge price reaction when the Iranian nuclear facilities were hit but…. For the first time in a decade, the industry is starting to dip into spare capacity—and for me, that’s a bullish signal for oil prices, not a bearish one and a point I keep coming back to.

Brad:

How should we think about the cost of these barrels relative to the oil price right now – you said its probably $65/bl to profitably drill a new well in the US right now – is it cheaper in other places?

Lydia:

It is – and this is important – OPEC can bring back barrels that are economic well below $20/bl, and some of the new fields in Guyana, Suriname, Brazil are economic below $35/bl – and this is a big change over the past decade – 10 years ago it would probably have cost $80/bl+ to get offshore barrels internationally on stream – today – that price needs to be less than $50/bl for companies to go ahead – and most are trying to get the cost down below $40/bl

Brad:

So, if these international projects are so low cost – how does the price go up?

Lydia:

Great question – and it’s about scale – US shale uses lots and lots of producing wells that can come on very quickly and stop very quickly. A lot of these international projects I’m talking about can take three to five years to build and start producing, and in 2020 the energy industry mostly stopped exploring for new oil and gas.

That’s had a huge effect on where we are today – sure the projects coming on stream are low cost and hugely competitive – but there simply aren’t enough of them to offset declines elsewhere. Without new investment 4.5-5.5 million barrels a day of production capacity is lost every year.

Can that gap be plugged? Yes, but it takes time – and in the meantime the market fixes that supply -demand imbalance with higher prices.

Brad:

I still struggle with lower cost oil meaning higher prices though and Lydia, I can’t help but notice you’re kind of skipping over the rest of 2025.

We’ve seen OPEC ramping up supply, and there are the big new projects that we mentioned coming online in Guyana and Brazil. I might be able to get the longer-term view, but can we really just brush past what looks like a significant supply wave heading into the end of the year and what is probably the riskiest point for oil prices.

Lydia:

Yes, that’s a fair point, and I will admit you’re right on this and I feel most nervous around the end of the year. Some big fields will start up in Q4 – three in Brazil, one in Guyana and a few small ones elsewhere globally.

Combined with OPEC supply having risen over one and a half million barrels a day since April and that is a lot of supply that’s coming to the market

Demand seasonally weakens, so that does mean inventory builds probably show up in Q4 – but that’s ok – it’s something we see this time of year every year, and it might be a bit faster this year – but the market already knows this – and given what I’m looking at into 2026 – we need an oil price that encourages supply – not destroys it.

Brad:

So the producers aren’t the only ones who need incentives. Getting gas to my car takes refinement and a broader supply chain. What about the incentives of those entities?

Lydia:

Let’s go back to the prices of diesel and gasoline – the products crude oil is used to make. In Europe prices are already hitting $99/bl for diesel and $85/bl for gasoline– when refiners are making money out of this – they have to run harder – and that needs more crude – I only worry about crude prices sustainably falling if those refiners start to lose money – which feels a long way off.

So, in the short term, there is enough supply that prices shouldn’t shoot up overnight – and that's fine. But the idea that oil's heading for $50 a barrel or that prices are in a 'lower forever' world? I just don't buy it. Every week, the fundamentals are proving tighter than expected. To generate the production required down the line, the right price signals must be sent now. Basically, higher prices today make sure there’s enough supply tomorrow.

Brad:

While I will still take some convincing on the short term, listening to you, it seems like the drivers of the oil market for the next 10 years are very different from what we've seen in the past decade.

There's a bigger role for international crude suppliers compared to the US and different sources of demand growth outside of China. That's an important insight because these changes will have significant effects across various economies and markets, not just for oil. We'll have to watch and see what happens in the short term, but it's clear this is a topic that can't be ignored.

With that our time together has come to an end. Thanks for listening to this Episode of The Flip Side.

We are not making any recommendation to buy, sell or invest in oil as a commodity or via other financial instruments, which involves substantial risks and may not be suitable for all investors.

Until next time, see you on the Flip Side.