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.
Oil has been struggling for the last two and a half years, but has dipped back into one its truly dark periods over the last couple months. Now, it also appears to be waking up to the very real threat of electric cars. In the last year, major oil companies and groups, including Exxon and OPEC, have rapidly scaled up their forecasts for the amount of electric cars that will be on the road in coming years. OPEC, for instance, quadrupled their expectations to 12 percent of all cars on the road by 2040. Some groups put that figure at closer to 33%.
FINSUM: Speaking generally, estimates for how quickly the electric vehicle market will grow vary widely, but one thing is clear—they will have a very material impact on the fossil fuel industry.
Raymond James took a page out of the president’s playbook in trying to explain the bear market currently occurring in oil. The firm argues that a lot of the current weakness in oil is not due to realities in the oil market, but rather bad or false reporting of headlines that have driven investor perceptions into the gutter. Raymond James presents 10 common headlines that have recently been published, all of which are both bearish and false.
FINSUM: So the common narrative of OPEC cuts being undermined by shale is false? Weak reporting or not, we disagree here. The overarching issue in the oil market is that oil reserves are abundant, getting it out of the ground is constantly getting cheaper, and the market is less consolidated, and thus more competitive, than ever.