Oil market set to be upended by surging EV demand: Analysis

Despite the recent sales dip, the electronic vehicle (EV) market is set to explode before the end of the decade, leading to an imbalance in the oil market that will further favour the uptake of EVs and create opportunities for investors across the EV supply chain, argues a leading market analyst.

This anticipated growth in EVs will lead to a substantial glut in oil supply that will, ultimately, lead to an imbalance in the oil market, says Hamish Chamberlayne, head of global sustainable equities at Janus Henderson Investors.

This imbalance, in turn, will further drive the electrification of transportation and create investment opportunities across the wider EV supply chain – including in mining, automotive technology suppliers, battery manufacturers, and semiconductors and system solutions providers, among others.

The “momentary” dip in EV sales – with sales projections decreasing by 6.7 million vehicles through 2026, according to BloombergNEF data – is expected to pass over the medium term, with the industry “on track to deliver sustained fleet growth”.

“In fact, a Bloomberg article in May reported six of the 10 largest EV carmakers in the US have seen sales increase between 56% (Hyundai-Kia) to 86% at Ford.” Further, he notes, General Motors (GM) is likely to lead the EV market’s expansion in the US, offering a number of competitively priced models.

Citing data from a 2022 Milken Institute Review paper, Chamberlayne argued that EVs are more affordable than Internal Combustion Engine (ICE) vehicles over their lifetime due to lower fuel and maintenance costs with fewer engine parts to go wrong. Average running costs to fuel an electric car were estimated at US$485 (AU$735) a year, compared to US$1,117 (AU$1,693) for a petrol-powered vehicle, according to data from a University of Michigan study, increasing their everyday appeal for consumers.

Again citing data from the Bloomberg article, he argued that “a significant transition is happening in the realm of EVs, with 31 nations having exceeded a critical threshold: the point at which EVs constitute 5% of new car sales”, auguring widespread acceptance of the EVs in the consumer market.

According to Chamberlayne, the forecast growth in EV sales could stymie oil demand growth by the end of the decade, with the oil market imbalance further exacerbated by a “surprising amount of supply growth”. As a result, levels of oil oversupply could hit levels not seen since the Covid-19 pandemic.

Oil supply glut

Citing International Energy Agency (IEA) figures, global oil consumption is set to “level off” at 105.6 million barrels per day – 4% higher than last year’s levels – over the medium term due to rising EV sales and improved fuel efficiency.

Running parallel to this, the IEA data showed that oil production capacity will continue to climb, with supply rising by eight million barrels per day higher than demand by 2030.

While global oil demand is projected to rise over the next few years, particularly in the developing world – and in large part driven by demand in India and China, as well as the aviation and petrochemical sectors – developed nations are fast weening themselves off the fossil fuel.

“[The] consumption of oil is expected to continue its long-term downward trend, decreasing from last year’s 46 million barrels per day to 43 million by 2030 — marking the lowest consumption level since 1991,” Chamberlayne said.

Further, China’s oil demand is expected to “level off” by the decade’s end, while it and a growing number of other developing nations are also set to introduce carbon-related taxes, driving up the consumer price of oil.

Chamberlayne, citing a 2021 paper by the National Bureau of Economic Research, noted that the resulting rise in carbon prices could drive oil prices higher, relatively, than electricity per mile travelled.

Investment opportunities from the EV explosion

For Chamberlayne, “these prevailing and converging trends offer a supportive narrative for sustainable investing, particularly within the broader EV supply chain”.

He concedes that while Janus “[hasn’t invested in many EV manufacturers, as we see that market as being quite a crowded space with a lot of competition with many incumbents sitting alongside new entrants], there are opportunities for investors across the value chain – “the companies making the enabling technologies”.

“Here we see attractive valuations and long-term secular growth trends that mirror those seen within areas of high performance, such as computing and AI.

“For these reasons, we have maintained our exposure to the broader EV value chain and remain excited about investment opportunities in this area of the market.”