EVs in India

EVs in India

Whoosh! Oil prices flew up 2% in US trading overnight. Brent crude is within a whisper of US$80 again. This isn’t going to help your hip pocket – or the emerging market stress that’s trashing currencies all over the world right now. You’d better be watching this.

It’s easy to suggest oil’s lift is because of Hurricane Florence – the massive storm on the east coast of the United States. But there’s no critical oil infrastructure in the pathway of Florence right now.

I’d say Libya, Venezuela and Iran are much more of a problem. Florence will blow out eventually, anyway. These three picklers are more of a permanent distress.

Murder and mayhem in Libya

Iranian sanctions are due to block its oil exports almost totally from November. South Korea is Iran’s biggest client to cut them off completely already. That’s no surprise. The US military guarantees South Korea’s very existence: Protection comes at a price.

But the Iranian sanctions must be largely priced in by now. This is not a new story.

However, the recent attack in Libya is definitely a wildcard. On Monday, gunman hit the headquarters of the state oil company and killed two people. They also detonated explosives. No one group claims credit for the attack. The reporter filing the story for The Wall Street Journal suggests ISIS.

Regardless, in the parlance of diplomats, we can say that Libya has a ‘security problem’. This is not good for world markets. Libya produces a highly desirable, light crude oil that refiners need more than ever right now.

Venezuela’s downward spiral

Then we have the ongoing, tragic farce of Venezuela’s demise. Argus Media reports that the President Maduro has restructured the state oil firm, PDVSA. It now has to to sell all its current and future foreign currency to the Venezuelan central bank.

Even worse, it will do so at the official government exchange rate. Considering this likely has no relation to the real (‘black’) market price, the PDVSA is being fleeced.

This will strip PDVSA of its ability to maintain its existing oil infrastructure, let alone generate any future increase. With no hard currency, it will be left holding worthless Venezuelan bolivars.

We can kiss goodbye to Venezuela as a major oil producer, and probably as a functioning society, for years to come.

And yet any oil bull dare not sleep easy.

Oil to soar, then crash?

The crash in emerging market currencies like the Turkish lira, Indian rupee and Indonesian rupiah must be making jet fuel, diesel and gasoline hellishly expensive in those markets. This is going to suppress demand at some point.

It’s also going to fast-track a switch to alternatives. The Indian government is now drafting a new plan to lift the sale of electric vehicles (EVs). It wants EVs to be 15% of total sales within five years.

New Delhi is also cutting the GST on lithium ion batteries and removing state permits for approved cars. Whether or not this rhetoric and planning is backed up by actual results, only time can tell.

But it’s not hard to see why two investment houses have come out this week and said oil demand is going to peak a lot earlier than anyone is currently pricing in. These two suggest within five years.

Nobody knows who’s going to be right on this. But it does become a nightmare for any oil firm considering capital allocation. Why invest for the long term in a shrinking market?

One scenario from this dynamic could result in higher oil prices than what otherwise might have been, as producers invest little in spare capacity and maintaining future production.

They’ll merely seek to balance the current market, perhaps for a minimum of a few years. These higher prices will in turn incentivise the further destruction of oil demand.

The world is simply turning against fossil fuels. I’ve mentioned before how California is fighting the Trump administration on rolling back emission legislation. Other states are joining in.

Now, the Golden State is banning piers, pipelines and wharves along its entire coast that can be used by the oil and gas industry. This is designed to stymie the Trump administration’s plans to expand offshore oil and gas drilling in US federal waters.

This new legislation follows on from the recent announcement that the major Trans Mountain pipeline due to run from Canada to the USA is still halted under court order. It may never happen.

This transition to a clean energy future will not be smooth. I have several oil stocks on the buy list for my Small Cap Alpha service. But they’re not something I intend to hold for a long time.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia