You need to think twice before betting on a rising oil price again…

by , 02 August 2017
You need to think twice before betting on a rising oil price again…
WTI Crude oil hit a low of $22 a barrel in early 2016. It then rose for much of the year, ending the year at $53.

But since the start of 2017, the oil price is down around 12% to $46.60.

So, with the oil price at lows, should you look at investing in the oil sector again?

Is demand growing fast enough or is supply still too high?

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The truth is – oil prices could drop all the way back to $30 again…
 
In a recent interview on Squawk Box in the US a leading academic with nearly forty years’ experience in the energy market said that oil prices could sink back to $30 a barrel if OPEC fails to make additional cuts to production.
 
“The problem is that there is too much oil on the market. There is too much oil from the U.S., too much oil from Libya, too much oil from Nigeria.” said Fereidun Fesharaki, founder and chairman of consulting group FGE, which focuses on oil and gas markets east of the Suez and in Europe and the U.S. “While the demand is robust, there is a serious likelihood that prices will sink next year to $30-$35 a barrel and will stay there for a while.”
 
And at this stage it doesn’t look like OPEC will cut its oil supply as deeply as is needed.
 
The promises are there... In a Reuters report from 24 July 2017 Saudi Energy Minister Khalid al-Falih said his country would limit crude oil exports at 6.6 million barrels per day in August, almost 1 million bpd below levels a year ago. 
 
Russian Energy Minister Alexander Novak also told reporters that an additional 200,000 bpd could be removed from the market if compliance with a global deal to cut output was 100 percent.
 
But here’s the thing…
 
OPEC members are still playing the bluffing game. None of them can afford cutting production and losing further income, but they all need a higher oil price.
 
So they promise production cuts. They have been doing so for more than a year now. But they still haven’t come to the table. Each time a member doesn’t cut production as deeply as promised, all the other members use it as a reason for not cutting their own production.
 
At the same time, the amount of rigs operating in the USA increased from 371 to 764 in the past year.
 
Simply put, once the oil price rises above $50 US shale operators start up their operations, production climbs and the oil price falls…
 
There’s a major demand bottle neck about to hit the oil sector
 
Technology will put major pressure on oil demand growth. Even though it is expected that the number of cars on our roads will increase in coming years, fuel demand won’t grow at the same pace.
 
Think about it…
 
A couple of years ago a car with good fuel consumption did 10km per litre. Now SUV’s often do 20km per litre of fuel.
 
Cars are getting more fuel efficient.
 
And then there’s hybrids and electric cars.
 
According to Morgan Stanley’s “Global Autos and Shared Mobility” team of analysts, electric cars will take over the world.
 
A recent article by the MIT Technology Review states that “Electric vehicles will become a more economical option than internal combustion cars in most countries in the next decade.”
 
And according to Bloomberg New Energy Finance around one in three cars in the world will be electric by 2040. Currently there are roughly a million electric cars in the world, compared to 1.2 billion cars in total.
 
That means, for electric cars to reach the one in three mark they will grow from the current million to 400 million. 
 
That is 400 times growth!
 
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Now imagine what that’ll do to the oil industry?
 
Tesla, the largest electric car company currently is showing that this rapid change to electric cars might be closer than we think…
 
In 2013, Tesla produced 400 cars a week.
 
By June 2016 the company hit the 2,000 cars per week mark.
 
Tesla’s end of 2017 target is 5,000 cars a week, with the 2018 target being 10,000 cars per week or around 500,000 cars per year!
 
I don’t know about you – but instead of sticking more cash into Sasol shares I’ve found a small company on the JSE profiting from the growing trend of electric car sales.
 
Here’s to unleashing real value
Francois Joubert
 



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