The OPEC Conundrum


Tesla may have just crushed the oil industry’s hopes of a decent quarter. 

It’s earnings season, and all eyes are on the state of the North American oil industry, so it doesn’t help that Tesla just blew away analyst estimates on its own earnings, reporting $1.86 per share against expectations of a $0.42 loss. More than two-thirds of all US oil is used in the transportation sector, so if Tesla is crushing it, the oil and gas industry is not. It means more demand is going to EVs and less to oil and gas. Other earnings to look out for are metals producers, which are another bellwether for oil demand due to their high energy consumption. 

The OPEC Conundrum: Lower Prices or Lower Market Share?

With too much oil on the market, and projections of slowing demand growth, Saudi Arabia is in a difficult position. All eyes will be on OPEC’s upcoming monitoring committee meeting next month, where they will assess compliance to the production cut agreement. 

Nigeria, Iraq, and Russia will soon find themselves under the microscope for failing to adhere to agreed-upon production quotas. 

OPEC is under immense pressure to act aggressively to manipulate global oil inventories and keep prices stable, and the outcome of November’s meeting will reflect that pressure. 

The meeting will not result in any actionable change in quotas, rather it will assess compliance and make recommendations to the entire group for discussion and debate – and possibly action – at the full meeting, which will be held in the first week of December.

READ ALSO  SE: BrewDog’s Pandemic Playbook

Beyond Iraq, Nigeria, and Russia, other OPEC+ signatories will be less eager to agree to additional cuts or an extension – particularly Saudi Arabia.

Russia’s involvement has always been on shaky ground: It doesn’t need higher oil prices to survive like the other oil-dependent economies such as Saudi Arabia. Still, it has signed onto the deal, and without Russia’s involvement, the production pact would be far less meaningful.

The meeting in December will not only be influenced by rogue members who have been overproducing, but an even bigger factor: oil demand growth. The EIA, IEA, OPEC, as well as a variety of analysts are all projecting a slowing demand growth for oil. When this slowing demand growth combines with growing US oil production, the outlook for 2020 oil inventories is not good, particularly for Saudi Arabia as it desperately tries to roll out the Aramco IPO. And Aramco’s valuation is tied to oil prices.

Between now and the November meeting, the market will be rife with speculation. OPEC will be faced with cutting more to prevent another glut – and giving away market share to the United States – or staying the course and watching prices fall further. Neither option is good for the oil cartel.

Big Renewables Growth Maybe Not Enough 

The IEA’s Renewables 2019 analysis published this week suggested that renewable power capacity additions are expected to grow 12% in 2019 after a lackluster 2018, with the expectation that the clean energy sector will continue a high growth rate for the next five years. But these gains in renewables may not be enough to carry the world past the finish line with its climate goals.

READ ALSO  Is The Battery Metal Boom Finally Here?

The IEA also reported robust growth in the distributed solar sector, with the commercial market set to explode thanks to lower costs – even without subsidies. But this fast growth presents another challenge: Power grids are not all financially structured to handle the loss of paying customers, and the costs of grid maintenance will be spread across fewer and fewer customers. 

Biofuel output is also on track to increase by 25% by 2024, with China leading the way, tripling its ethanol production in that same timeframe thanks to government blending mandates.  

Finally, the IEA predicts that renewable generating capacity on the global grid will match that of coal capacity by 2024 IF major issues like grid integration and policy matters are addressed – but that’s a rather big “if”.  

The IEA considers the next five years to be crucial for the renewable energy market – and by default the fossil fuels market. While most of the renewable forecasts appear positive, the IEA cautions that it still needs to achieve even greater growth if the world is to meet its longer term climate goals.