Incredible photo illustrating oil glut | General financial discussion | Discussion forum

Bud said
Fake news  

Yep, this is obviously fake news too -- people should demand their money back

Bill said
Doug, maybe you (or someone else here) know(s)……..I don't really follow this stuff but some people seem to think we don't hardly need oil and at the other end others say we'll need lots, even more than now, for decades to come. Any facts on that? That truth would be important to know if you're considering investing in it, I imagine.

It is both.

The glut is a short term situation from the dramatic drop in fuel consumption from activities like airline travel, cruise ship travel, and personal automobile use.

Once everyone is driving to and from work, flying around, and taking cruise vacations again, oil consumption will be up and the glut will be gone.

Bill, we will still need oil for planes, and for various types of chemicals and plastics for the foreseeable future. The biggest sector that may soon stop using oil is automobile transportation. However, this depends on how good we are in laying new infrastructures for hydrogen fuel cell, and how good we are at expanding our electricity grid and generation capacity, along with will there be breakthrough in battery technology, as current battery technology have relatively low energy density.

At the moment, the coal industry is severely depressed due to the extremely low natural gas price, in which they are close substitute of each other. However, if you expect India will become the next China (economy develop quickly), it maybe a good time to buy small amount of coal miner shares at the moment. This is especially true because many O&G company in US may go bankrupt due to this crisis, and those company also produce many gas. (I do hope the Indian can use more hydro and nuclear instead, as I still want a future, and not die of lung cancer .)

Norman, it will be a while before people will conduct leisure travel again, henceforth, the demand, and the price will be suppressed for a while even after the disease is gone. This is especially true because there are massive inventory of oil at the moment, so much so that it use up all the storage capacity. (This explain why price for WTI future for delivery in May dip significantly into negative, as buyers of said future have no place to store the oil when it is deliver, and are paying others to take it off their hand!!!)

Thanks, though I'm surprised that we have the technology today to replace fossil fuels (81% of USA energy comes from fossil fuels), I can't imagine what these other sources would be in the near future? But that's interesting news, I guess, that it's just a matter of price and not really technology.

Jon, re the travel industry, I think you'll see bargains like you've never seen once the cruise ships, etc are up and running, people will see their neighbours partying again and won't be able to resist. In fact, it'll be the biggest rebound the world has ever seen, ever, it'll be tremendous, it'll be truly incredible, incredible, and it's not me saying that...…..

Consider this as a rough example without me fact checking each data point.....

Oil demand before the crisis was 100 million barrels per day and growing at an average of 1 million barrels per day per year, or about 1% annual growth.

Global real GDP growth was in the order of 2-2.5% per year, necessitating energy demand growth in the order of 1.5-2% per year... assuming productivity and energy efficiency growth is worth 0.5% (hence energy demand growth does not track real GDP growth completely). The difference of circa 1% is thus renewable power generation (hydro, wind, solar) for EVs, etc.

We can pretty much say natural gas is displacing coal in electrical generation so that takes care of that segment. Renewable power in the form of solar and wind is displacing natural gas growth a bit along the way meaning natural gas demand growth would be larger than it otherwise is. Now to oil....

Oil demand has likely dropped 20+% as a result of the shut down, so perhaps down to 75-80 million barrels per day. It will take at least a few years for energy demand to bounce back in a big way, but when it does, oil will still be the bulk of the bounce back. Will it ever get back to 100 million barrels per day? Probably not for a number of reasons:
1) Renewable power will take a bit of it, but not much because very little power generation is by oil these days anyway. Usually isolated communities (diesel) or various islands like Hawaii. More of these users are switching to renewable power but they don't make much dent in oil demand in the first place.
2) I doubt air travel will recover 100% and I suspect marine shipping will fall off somewhat due to less global trade (as a result of seeing how global supply chains have broken down in this crisis). I have doubts about less vehicles on the road.
3) More and more EVs will take to the roads resulting in less gasoline usage.

But any thoughts that renewable power will be there to cover the recovery surge in energy demand post-crisis is a fallacy. It would take trillions of dollars and a decade or more to fund the sourcing and distribution of renewable power to replace all those millions of barrels per day of oil demand that would otherwise surge back in an economic recovery. It physically cannot happen faster.

The best (most optimistic) scenarios about oil displacement still have global oil demand in the order of 50-80 million barrels per day for the indefinite future of 2035 and beyond. There simply is no viable substitute for many uses such as jet fuel, construction and forestry machinery, marine shipping and petro-chemicals.

News of oil's death is thus greatly exaggerated. Granted pressure on pricing due to subdued demand growth will cause many oil companies to go out of business and/or for marginal production to be abandoned, so supply availability will decrease along with demand destruction. Econ101 at its finest!

Short answer: There still will be a healthy oil industry but it will no longer be a growth industry. The best players will still generate solid earnings and reward shareholders like most mature industries still do. Stock pick wisely!

Disclosure: I spent 27 years in the industry but have had no ties to the industry since retirement 14 years ago. I do not own any oil stocks but I do own infrastructure stocks like oil and gas pipelines (e.g. TRP and ENB).