Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Electrification boom ends OPEC
Ole Hansen
Head of Commodity Strategy
Summary: As electric vehicles become more affordable, could oil-rich OPEC become irrelevant in 2025 and find itself on the ash heap of history?
In the space of just a few years, China has made a mockery of all prior assumptions about the potential scale of both EV production and adoption. Schroders, a nearly trillion-dollar asset manager, touted growth potential for Chinese EV production back in early 2021, projecting that EV sales might reach close to 5 million vehicles by the end of 2024 and a market share of 15%. The ensuing reality blew the roof off these projections, as Chinese EV registrations rose above 8 million already in 2023. And by September of 2024, EV market share of new car sales was reaching north of 45% in China, as overall EV sales growth rose above 40% year-on-year. This is some six years quicker than expected.
China is showing the way in the transportation electrification boom. As other countries join China in rapidly building out exponential growth in production capacity, battery prices will deflate further, making EVs cheaper than their petrol-burning counterparts, with a crossover point in costs within 12 months, even on an unsubsidised basis. With an exponential adoption rate curve dead ahead, it brings forward projections of peak oil to as early as 2025 and the anticipation of an accelerating decline in demand in the years ahead.
In 2025, with the writing on the wall on the forward demand picture since two-thirds of oil ends up as gasoline or diesel in cars and trucks, OPEC finds its relevance shrinking further and its multi-million barrel per day production limits irrelevant. With some members already cheating production quotas to grab what income they can and export demand falling, a majority of members quickly realise the jig is up. Amidst the bickering and in-fighting, key members leave. This consigns OPEC to the ash heap of history. Former members max out production to ensure market share, driving a large drop in oil prices.
Potential market impact: Crude oil slumps in price, a boon for airlines, chemical, paint and tire manufacturers and freight and logistics companies. But the market balances quickly and oil prices stabilise, as higher cost suppliers, especially in North America, shut down expensive shale oil production. Japanese carmakers find themselves in a desperate race to catch up with other EV players.
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