CONCERNS over global glut continue to haunt the crude markets, as skepticism over an OPEC led, coordinated output cut remains alive and kicking. Six-week market lows registered last week, highlighted the weakening trend. The Algiers deal premium appears to have perished.
OPEC plans to meet on Nov. 30 to formalize and announce the output management deal, agreed upon late September.
Once in place, this was to be the first crude supply cut in eight years, involving both OPEC members and producers from outside of the group notably Russia. But the deal now looks increasingly unlikely. The initial euphoria is gone.
Many now feel that the rising October OPEC production and a faster ramp up of new non-OPEC projects have reduced the odds of an agreement. The average OPEC output in October was around 34.2 million barrels per day last month.
Consequently, the global physical market is getting sloppy or oversupplied again. Already, deals involving the storage of oil on tankers are picking up, which only exacerbated the oversupply condition.
Next year could be another challenging year for the energy industry, many now think.
Goldman Sachs Group Inc. is weary of the emerging scenario. “The lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30,” Goldman analysts including Damien Courvalin wrote in a note dated Oct. 31.
“The lack of an agreement so far has pushed oil prices sharply lower, with weakening oil fundamentals warranting oil prices in the low $40s a barrel in our view if OPEC is unable to deliver a convincing agreement,” the Goldman analysts wrote.
Even if the fear of slumping oil prices prompts the group to hammer out an accord, the probability of the deal successfully reducing inventories remains low, the bank felt.
Other factors are also contributing to the woes of crude markets. And OPEC has no influence on all of them. As the US rig count rebounded, the output is growing there too. The EIA reported Monday that US output reached 8.7 million bpd in August, up from a low of 8.5 million bpd earlier in the summer.
And in the meantime, markets also appear in for some long-term structural changes. And that is more worrisome – to say the least.
Royal Dutch Shell Plc, the world’s second-biggest energy company by market value, thinks demand for oil could peak in as little as five years, a rare statement in an industry that commonly forecasts decades of growth, Bloomberg reported.
“We’ve long been of the opinion that demand will peak before supply,” Chief Financial Officer Simon Henry said Tuesday. “And that peak may be somewhere between five and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”
Michael Liebreich, the founder of Bloomberg New Energy Finance, predicts a peak in 2025 and decline in the 2030s. Speaking of demand growth, Liebreich pointed out in a press interview that “the orthodoxy of ‘rampant growth’ has turned into ‘less rampant growth’ and actually now, ‘not very rampant growth’ at all.” Bloomberg New Energy Finance estimates that plug-in cars will displace 13 million barrels of oil a day by 2040. Fitch Ratings reported Oct. 18 that battery technologies used by electric cars could trigger a “death spiral” for investors with securities linked to fossil fuels.
“For the first time, oil companies have to think seriously about the future,” Alastair Syme, an oil analyst at Citigroup Inc. in London told Bloomberg.
Drillers that even a couple of years ago believed “every molecule of oil we produce will have a market,” have come to realize they “can afford to bring on only the most competitive assets.”
A World Energy Council report underlines that if rapid improvements continue in renewable energy, electric vehicles, and other disruptive technologies, petroleum consumption will peak in 2030 and decline thereafter.
The plunging cost of renewable energy - with solar module costs falling 50 percent since 2009 - is already upending the business model of utilities. Disruption could spread to the oil industry as electric vehicles become more economic than gasoline or diesel cars, potentially displacing millions of barrels of daily fuel use by the late 2020s. Projections for decades of demand growth that underpin investments in oil projects could be misplaced, the report underlined.
“Given the advances in battery technology, by 2030 carbon-powered vehicles will be the exception rather than the norm. This will inevitably impact on oil demand,” Alex Blein, London-based energy portfolio manager at Amundi told the press.
Yet, some are contesting the disruptive power of battery powered cars.
The anticipated increase in demand of about 20 million barrels a day over the next two decades will probably be big enough to overwhelm the impact of the electric car, said Spencer Dale, chief economist at BP Plc. Those vehicles will have a bigger impact in 30 to 50 years, although there’s a chance it could happen sooner, he conceded.
And although “the IEA has significantly raised its estimates for the deployment of renewables,” reflecting energy-policy changes around the world, yet it remains skeptical that electric cars will end the age of oil. Electric cars won’t cause oil demand to peak anytime soon, underlined Fatih Birol, the executive director of the agency. “The oil demand growth is not coming from cars, it’s from trucks, aviation and the petrochemical industry and we don’t have major alternatives to oil products there,” the energy guru told Energy for Tomorrow conference in Paris. “I don’t buy the argument that electric cars alone will cause a peak in oil demand at least in short and medium term.”
Although the number of electric vehicles on the roads has risen six-fold since 2014 with 550,000 new plug-in cars sold last year, as per the IEA, yet, electric automobiles made up less than one percent of all new cars sold last year. For them to disrupt the existing global energy model appears a task much beyond means – at this stage.
The overall crude scene is fluid – to say the least. Both immediate and long-term influences continue to shape and impact the global energy dynamics. Yet in the distant horizon, the threat of alternatives are lurking, one cannot deny. The oil era has to come to an end – sooner or later. Some are beginning to assert it is drawing closer.
The oil-dependent economies need to take note of the emerging trends – one cannot help overemphasizing.
