The oil price collapse during 2018’s fourth quarter was a rout driven by concerns over a slowing global economy and weakening energy demand, coupled with the fear that OPEC had been suckered into boosting its exports just as the sanctions on Iran proved to be less substantial than anticipated. That set the world up for an oil supply glut. That prospect not only stopped the rally, expected to carry oil prices back to $100 a barrel, but sent prices down instead. As commodity speculators unwound their long futures positions and started building short ones, oil was beaten down severely. The chaos of that quarter obscured changes in fundamentals impacting the long-term outlook for the oil business. Disruption is coming from the changing role of OPEC in global oil markets and its pricing, as well as the American shale revolution. Under the climate change banner, the energy landscape is shifting. Carbon is the issue. Surprisingly, the oil industry may the best positioned to actually lead the decarbonization of the world’s energy system, but it will require executives to think differently about their business going forward. We explore some of the those issues.
Energy stocks were the worst performing sector last year, but crude oil turned out to be the worst performing commodity over the past decade. Palladium took the decade’s performance crown. The poor investment performance of crude oil is consistent with oil stocks seeing their role in the market decline to nearly a point of irrelevance. Oil had a strong January and is well-positioned to generate a solid return this year, largely because of where it started 2019. Past performance, however, is not a guarantee of future results.
A big oil market disruptor on the horizon is IMO 2020. The initial price spread between high-sulfur (current) and low-sulfur (mandated) fuel in Asia is narrower than expected. Admittedly, there is not a strong demand for IMO 2020 compliant fuel yet, but the progress shippers and refiners are making to ensure adequate compliant fuel is available in 2020 may undercut the scaring oil price scenarios that have been predicted as a result of IMO 2020. We’ve never embraced those scary price scenarios ($250 a barrel), but recognize that any time you force such a massive structural change on an industry, there will be an impact, and higher prices are likely.
Tesla has increased the price of its Powerwall home battery storage system, countering the supposed trend for all renewables and associated infrastructure costs to constantly fall. Lower costs are the key to our renewable energy nirvana arriving soon. An analysis of what battery storage costs will be for a newly proposed rail line in the UK to be powered by wind turbines shows the project to be uneconomic, let alone a landgrab and a visual eyesore. As Australia, who purchased the Tesla Powerwall, found out during its latest heat wave/power outage, the battery provided 80 minutes of power and without the backup diesel-powered generators (first time they were ever used) the 25,000 people without electricity for the night would also have been without power the following day. We are always skeptical of “happy talk.”