One of the world’s most mundane and commonplace features, a bastion of modern transport infrastructure, shall cease to exist in the reasonably near future. Electric cars, which many see as the future, will require a different model for refueling. In particular, they will be charged not at stations, but in parking lots, ultimately eliminating the need for gas stations. The only ones that will eventually be needed will be along highways, where distances traveled will exceed single charge ranges for electric cars. However, getting to this reality will be a challenge, as a century of infrastructure development has been centered on building gas stations on every corner.
FINSUM: We think it will take a long time to get to this stage, and that some gas stations will remain, but eventually we might get here. There are some interesting companies working in this area which could prove great long-term investments.
It might seem like it is an over-stretched forecast, but Barron’s is warning investors to prepare for another steep and prolonged drop in oil prices. While prices had a recent bottom in early 2016 at below $30, they have held steady just below $50 of late. The issue is that confidence in OPEC is running very low. The first round of cuts it did clearly didn’t work out, but it renewed them. Since the new deal has been ineffective it is now suspected that several countries will start to cheat on the agreement by overproducing, or pull out of it altogether, which could lead to a sharp and destabilizing drop in prices.
FINSUM: With confidence already so low, a single day dissolution of the OPEC cut agreement could be just the catalyst oil needs to head back down to the $30s.
The oil market is closing in on an almost three-year run of bad news. Oil originally fell because of over-supply to the market, and that theme—despite OPEC’s cuts—has persisted for years, with US shale more than accounting for OPEC’s cuts and keeping the market flooded. Electric cars are slowly sapping oil demand as well, and now a government-driven trend will deliver another blow. That gut punch will be the rising trend of governments banning the use of gasoline and diesel vehicles in some locations. For instance, the UK and France have already passed sweeping rules aiming to phase out all fossil fuel based cars.
FINSUM: Oil continues to receive more and more bad news and our view, which we have maintained for some time, is that prices will likely never regain their former glory (or at least not until oil becomes a niche product long in the future).
If there is one thing clear in the oil market, it is this: OPEC’s ploy to cut output in an effort to raise prices has failed. The cartel has twice put in place an agreement to lower overall output, but it has failed to prop up the market, as the bloc continues to be undermined by non-OPEC producers pumping ever more oil. Now OPEC has a new problem on its hands—how does it end the agreement without causing even more of a rout than is already in place? Saudi Arabia is already saying the deal will not be renewed when it ends in March 2018, but that it does not want to “shock the markets”.
FINSUM: We don’t think markets will be shocked when this deal is not renewed because the writing has been on the wall for months. It will have the effect of lowering oil prices further, however.
When the CEO of one the world’s largest oil companies says that his new car will be an electric vehicle, one has to wonder about the future of the whole industry. That is exactly what happened this week when the CEO of Royal Dutch Shell said he was trading in is diesel for a new Mercedes electric car. The news comes at a time when oil prices continue to be low on the back of oversupply, and electric vehicle investment and sales are surging.
FINSUM: Our own view has been well-described in this publication, and we continue to stick to it—that electric vehicles and renewable energy are slowly sapping demand for oil, while all the while producers continue to pump too much to meet demand. Thus, we do not think oil prices will ever again recover to their former levels.
Anyone who thinks oil prices are headed higher is misguided. Most experts agree that the future for oil is not bright at all. While there may be short-term rallies in the near future, the long-term outlook is very bleak. This is driven by three primary factors. Firstly, US shale will keep the market oversupplied for some time to come, secondly electric vehicle demand will grow, undermining oil, and thirdly, emerging market demand will not stay as robust as it has been (solar and electric vehicles are growing there too), taking away a fundamental growth driver.
FINSUM: The writing is on the wall for oil, and in our view, even near term prices are likely to stay weak because of the competitive and over-supplied market.