Futures prices have been, for the most part, relatively flat this morning. WTI crude has been hovering around the $50/bbl mark for upwards of a week now, and will likely continue to be the case due to speculation over OPEC’s ability to implement a supply cut/freeze agreement in late November. The slight downward pressure seen by the red numbers on the screen can be attributed to last week’s Baker Hughes report as well as production data from the National Oil Corp.
The U.S. increased its active oil and gas rigs last week by fifteen to a total of 539, extending the string of weekly increases to sixteen. Since this streak started back in June, more than 100 rigs have been added; coincidently, the country’s crude inventory rose to a record level of 474 million bbls earlier this month. Globally, the National Oil Corp. revealed that Libya, an OPEC member, increased production last week from 540,000 bbls/day to 560,000. Additionally, it is believed that Iran, another OPEC member, might be just a week or two away from hitting its post-sanction lifting target of 4 million bbls/day. In the run-up to November’s critical OPEC meeting, it seems that the supply glut is once again, and justifiably, on everyone’s mind.
Over the last year or so there have been multiple meetings between OPEC and non-OPEC members in which the hot topic was whether to cut or freeze production, and we know that will be the main agenda item in November. However, an interesting article came to my attention this morning which makes me question why any producer would actually want to slow production at all.
Bloomberg.com posted an article yesterday about the World Energy Council and its “Visions of the Future.” According to the WEC, oil demand is expected to peak relatively soon and then decline after 2030. This is no arbitrary evaluation. In fact, the IEA, which continually publishes its own demand estimates in its World Energy Outlook publication, has scaled back its demand forecast for oil quite zealously over the last twenty or so years in conjunction with the increase in renewable energy. Electric cars, solar powered buildings, wind-turbine farms, geothermal heating, and compressed natural gas (CNG) are no longer the grandiose ambitions we once imagined, but rather an increasing reality.
Graphical representation of the International Energy Agency's revisions to their annual World Energy Outlook.(Bloomberg)
Now, I am not saying that Elon Musk with Tesla Motors or CNG-powered buses in both major and minor metropolitan cities will put an end to oil as we know it, but this article gives sound reasoning as to why the demand for oil and refined products is in an apparent downward spiral and that the peak for oil could be relatively soon.
So let’s revisit OPEC. If the WEC’s reports and the IEA’s WEO estimates have validity behind them, then why would oil producers facing a potential oil demand peak, want to cut/freeze/limit their production? Take Saudi Arabia, for example. According to Reuters.com, the kingdom has roughly 266 billion bbls in reserves. At current production rates, those reserves would last for another 70 years. But what if the oil demand peak is nearing and current projections show a slowdown after 2030? If that’s the case, 30-40 years of oil reserves would be what, stranded?
This is of course an exaggerated example, but it does represent a true need to understand the changing world around us. Why on earth would a country such as Saudi Arabia, built on oil, and whose oil industry accounts for roughly 19% of the world’s oil, agree to cut or limit production, when time to produce may in fact be limited? November’s meeting between OPEC and non-OPEC members will be very interesting to say the least.
RBOB is currently up 86 points, ULSD is down $0.0125, and WTI crude is still hovering around the $50/bbl mark at $49.76.