Trends in oil markets - it is bullish for oil but with some complications

[Marcin + 519]

There are a few strong long-term tendencies that are taking shape in global oil  markets.

(Similar forces are at play in natural gas market but it is much less important than oil)

If this topic was discussed before at oilprice - please leave a link in comment.

- Rising demand in the developing world.

The total demand was stable or stagnant in last 10 years (2008-2018) for combined North America, Europe, CIS, Japan : 49 m bbl/d in 2008, 48 m bbl/d in 2018, -1 m bbl/d last decade. Combined demand of South America&Africa was marked by slow increase: 9.2 in 2008, 10.8 in 2018, +1.6 m bbl/d. On the other hand we had dramatic increase in combined demand of Middle East and Asia Pacific minus Japan: 28.5 in 2008, 41.1 in 2018, +12.6 m bbl/d !.

Major countries in Middle East and Asia Pacific region have still low per capita consumption, in total this region is 60% of global population and 40% of oil consumption. There is enough room for at least another +10 m increase in next 10 years. Add to this accelerating demand in South America&Africa.

- Scarcity of oil discoveries and development of extraction and transport infrastructure.

There are many articles all over the media about low rate of new discoveries in recent decade.

Scarcity of easy & cheap to drill oil requires development of bottom of the barrel sources: shale oil, deep water offshore, Canadian oil sands, Venezuelan heavy oil. All the sources are not easy to tap because of  financial, environmental, political and technical obstacles. So apart from US shale oil in my opinion all these sources will be under developed in next decade until prices will go over the roof. 5-8 years after price shock new oil will reach the markets.

- Rising refining capacity in oil-rich and developing countries.

Oil will be more scarce at global markets as many developing and oil-rich countries are fast upgrading or planning to upgrade their refining capacities (Saudi Arabia, UAE, Iraq, Iran, Qatar, Nigeria, China, India, Vietnam etc.). There will be more price premium for crude oil in comparison to oil products.

- Changes in the oil market itself: increase in multicurrency trading.

After WW2 the only currency allowed for oil trading in global markets was US dollar. This trend was slowly changing since 2000 and it accelerated in the last 2 years.

In January 2003 Iraq moved temporarily from pricing oil in US dollar to Euro, but Iraq moved back to oil pricing in USD in May 2003. In 2003 Iran moved from pricing oil in US dollar to other currencies, mainly euro. In 2018 Venezuela moved to pricing oil in other currencies. Starting in 2018 Russia is moving from US dollar to euro and yuan. In March 2018 China started yuan denominated oil contracts at Shanghai exchange. There were many other smaller and temporal attempts

Russia and China decision to trade oil for other than US dollar currencies was crucial. In my opinion the trend will increase over time, in 5 years about 10%-15% of global oil will be traded in non-US dollar transactions, in 10 years (if European Union switches to buy oil for euro) it will be about 40%-50% of global trade.
This move will be bullish for oil as currency competition will substantially increase price in US dollars, but it will also bring a lot of volatility.

Please comment, correct errors.