OPEC and Company!
OPEC is getting ready to have a big party in Vienna as they hammer out an extension of the current OPEC agreement on limiting oil production. While there has been some last minute negotiating by some players like Iraq, it is likely the deal will be extended by nine months.
The Wall Street Journal is reporting the, “Ecuadorean Energy Minister Carlos Perez said most OPEC members support a nine-month extension of cuts at current levels of about 1.8 million barrels a day." Russia, the largest of the non-OPEC producers in the agreement, has said it supports a nine-month extension. One country they do not have to worry about when it comes to compliance and that is Venezuela. Venezuela pumped 2.02 million barrels a day in April, a 310,000-barrel-a-day decline from a year earlier and the steepest drop among OPEC countries. So now the question becomes whether or not that is going to be enough to get the global market in balance. The answer is yes.
We all know the Saudis have a lot riding on a higher oil price because of the pending initial public offering of 5% of the stock of the state owned Saudi Aramco next year but there is more behind this cut. New fears about so called “peak oil” demands are scaring the Saudis into trying to modernize their economy that is still mainly dependent on oil. While the fears of peak oil demand are probably more real than actual peak oil production, the fears are being overstated and should lead to underinvestment in oil because oil producers and energy companies are taking the threat seriously.
While global oil demand continues to set records, there are fears that could change in a decade. The advent of reliable electric cars and breakthroughs on fuel efficacy, it clouds the future oil demand outlook. The Wall Street Journal reported that forecasts for peak oil demand diverge by decades. The Paris-based International Energy Agency argues that demand will grow, albeit slowly, past 2040. And the two biggest U.S. oil companies, Exxon Mobil Corp (NYSE:XOM). and Chevron Corp. (NYSE:CVX), say peak demand isn’t in sight. Yet companies in the EU like Royal Dutch Shell (LON:RDSa) PLC and Norway’s Statoil (OL:STL) SA are placing bigger bets on natural gas and renewables, including wind and solar to diversify away from oil.
This comes after global investment over the last few years in energy fell by a record, mainly due to falling prices but also do to fear about the future of energy. The current stubborn glut of supply and talk that demand could dry up could lead to significant underinvestment to meet demand, peaking or not, that will grow faster than production for the next ten years.
While countries like India and China may look to an electric car future, the reality is they will also have to invest in massive electric grid capacity to charge all those electric cars. In the meantime, a false sense of security in the U.S. will cause a late year oil price spike.
Speaking of China, a downgrade has miners worried. Moody's Investors Service downgraded China's credit ratings the first time since 1989. Moody’s warns that the financial strength of China’s economy will erode in coming years as growth slows and debt continues to rise.
My buddies at Gas Buddy are ready for the summer driving season, checking out gas prices wherever they can find them. They are reporting that more Americans are planning to hit the road this summer compared to 2016, according to their annual Summer Travel Study. They say that more than 82 percent of their people surveyed said they will take a road trip this summer, a 7-percent increase from last year and a 9 percent increase compared to 2015, with a majority (70 percent) planning to take at least two trips.
Gas Buddy goes on to say that, “A key finding behind the surge in travel is a feat never before seen: the national average gasoline price today is nearly the same (up 1.5 cents) as it was to start the year ($2.34), compared to the average increase of 47 cents, and also nearly the same as Memorial Day last year ($2.33). The stability at the pump is likely sparking optimism for the upcoming summer driving season as motorists have not been hit hard by skyrocketing gas prices during the spring.”
For motorists hitting the road, gas prices this Memorial Day will be the second cheapest in the last decade at $2.39 per gallon, substantially lower than the ten-year average of $3.15 per gallon. Since Memorial Day 2016, the average price for a gallon of gas has fluctuated just 31 cents, dropping to the low of $2.12 (Aug 4, 2016) and rising to the high of $2.43 (April 22, 2017).