There is a very definite trend developing in the Oil market.
The concerns over climate change are widely held. This has become a constant long term background factor in the pricing of oil. This has also meant there has been a rather strict public opinion backlash toward any new development of fossil fuel resources.
Both companies and national governments have been very much aware of this for several years. Making sure they maintain as environment a friendly a posture as is possible. But, just what is possible?
Globally, the development of further oil field production had come to a virtual standstill. Yet, all the while, more and more petrol vehicles are hitting the streets of the world as the overall population continues to grow rapidly.
Electric vehicles now have a firm and growing place in the market, but have a very long lead time to approaching even a reasonable fraction of total vehicles. Electricity production by power station still must supply these vehicles as well if their owners do not have direct access to a renewable source.
The energy requirements via the traditional power grid is very high for these vehicles. In some cases, still requiring fossil fuel sources until the complete shift to renewables can be made at all levels. This will take several decades.
Hence, Elon Musk’s assertion that a continuing fossil fuel bridge is required to reach the end objective of being predominantly renewable energy dependent. Much of the non-western world though, may well be another long stretch of a further one or two decades to get to this point.
Fossil fuels, oil, had become an almost taboo topic.
Russia/Ukraine changed all that, but is only a catalyst for highlighting the energy challenges ahead for the world. Production and supply can both be controlled and interrupted by individual nations. Crises can erupt when unexpected.
Whether we like it, or not, the world is still largely fossil fuel dependent and will be for some time.
After the initial skyrocketing of the oil price as the Russia/Ukraine conflict began, the sentiment of the market became dominated by the fear of a slowing world economy with many nations raising interest rates at the same time.
The world economy is most definitely slowing, but was too much of this slowdown priced into oil?
There is a baseline of energy demand as people simply go about their daily lives. The impact of a slower or stagnant economy may not crimp demand to the extent many had expected. In fact, energy demand may continue to rise in a slowing global economy due to normal population growth.
The big trend though, is in the public opinion domain. It may continue begrudgingly. Everyone wants the nirvana of full renewable energy supply tomorrow, but it will take much longer than that.
Elon Musk’s comments are part of an already occurring shift at all levels of society. A recognition that oil is necessary and is a supply must have still.
Last, but not least, people do not like paying so much for the stuff. Oil may yet have friends again.
In the meantime, excessive downside had already been priced in. There may simply only be upside from here.
Initial target $112. Potential in coming years as high as $150. Even $200, should ever a competition for scarce supply get underway between national governments.
Expect stock piles to be added to, slowly at first, but recognising Oil remains absolutely essential even in the minds of EV manufacturers, and future additional geo-political crises are possible, it makes sense for governments to make some long-term decisions on oil storage levels.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities