Rough Ride Ahead For Crude Oil

SYED RASHID HUSAIN (May 21, 2018) – Crude markets are entering an absorbing phase. Prices continue to hover around $80 a barrel, amid indications that prices could soar further. Yet, concerns about oil markets persist.

Eminent energy analyst Daniel Yergin, once described by the then Aramco chief Khaled Al-Faleh and the current Saudi energy czar, as the rock star of the energy world, is of the view that oil prices may continue to rally past its 3½-year highs, all the way to $85 a barrel, as soon as July. “We could see oil prices in July when demand is high … several dollars higher than it is. We could see it as high as $85 at least for a short period of time,” Yergin, Vice Chairman of IHS Markit, told CNBC.

Yergin’s remarks added an influential voice to a chorus of analysts warning about prices’ spikes. A Goldman Sachs report too earlier underlined Brent crude could spike above its $82.50 summer forecast, while Bank of America Merrill Lynch warned Brent could hit $100 a barrel by next year.

This all is interesting – from a different perspective too. The price spike may be beginning to impact the overall energy balance adversely. Oil’s rise to $80 a barrel is stoking concerns that the rally will erode demand. In the aftermath of the rise in crude prices, the Paris-based International Energy Agency (IEA), the OECD energy watchdog, has cut oil demand forecasts as the recent growth in oil prices continues.

Just a couple of weeks ago, IEA Executive Director Fatih Birol had warned of the consequences of the rising oil prices. It may hurt demand scenario, he had underlined then. Now his agency is reporting that prices have already begun impacting the demand aspect of the global oil equation.

It’s not simply an issue of high prices curbing demand, Felicia Jackson points out while writing for Forbes. Investor perception of the industry future is undergoing a change. Oil majors are reassessing the crude future and how far oil extraction and exploitation will continue to be the dominant paradigm.

Mark Fulton, Senior Fellow at Ceres, Founding Partner at Energy Transition Advisors and co-author of the recently released Clean Trillion report told Jackson, ‘Oil demand is likely to peak in the next few years, well ahead of many companies’ expectations.’

According to Ceres, investors are increasingly seeking to mitigate their exposure to investments with high physical and environmental risks, such as water scarcity, emissions, pollution or other costs related to climate change. This, in turn, favours clean energy, which tends to be far less vulnerable to climate impacts than conventional baseload power generation and associated infrastructure.

Oil majors are keeping an eye on this changing landscape, Jackson continues to point out. Today around five per cent of Total’s portfolio is in renewables with a capital investment of $5-6 billion. In 20 years Total CEO Patrick Pouyanné believes, the company’s renewable portfolio would grow to 20pc.

Spain’s Repsol is also no longer intending to seek growth in the oil sector. As per emerging reports, its new business plan limits, oil and gas output to current levels and keeps no more than eight years of reserves in stock.

To reflect its evolution into a broader energy business, Norwegian oil giant Statoil has just changed its name to Equinor. The name change is also a reflection of the importance of the energy transition, the chair of its board Jon Erik Reinhardsen was quoted as saying.

As per Jackson, the big issue remaining about the future of the energy mix is what the market’s response will be. In 2016 there was roughly $300bn invested in renewables and $300bn in fossil fuels. In 2017, according to Ceres, investment in clean energy was more than $333bn compared to only $144bn in conventional fossil fuels and nuclear.

Clean energy technologies such as wind and solar thus seem to emerge as a threat and competition to fossil fuels and nuclear power, some now feel.

Consequences are evident. Despite the Iran hiccup, the tightening of the markets, thanks to the Organisation of Petroleum Exporting Countries (Opec) output cut arrangement with the non-Opec Russia and the falling Venezuela output, crude oil markets have not gone berserk. Indeed the growing US output has also played a significant role in this market stabilisation.

A massive structural change is underway, with long-term consequences. Oil is faced with many challenges — at the same time. All this could mean that despite the recent price rise, in the longer term, crude markets will not be as rosy — as it appears at the moment.

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