29/08/2017 by Alibra Shipping 0 Comments
ENTER THE DRAGON: CHINA PACKS A PUNCH IN THE OIL MARKET
So far the results following OPEC’s output reduction plan have been met with mixed reactions. Analysts expect the market
to remain between $40-60/bbl for at least 5 years with no significant recovery beyond 2022. Even Shell executive Ben Van
Beurden stated oil will remain ‘lower forever’ and highlighted the significance of electric cars in reducing oil demand over
the coming decades. The International Energy Agency’s (IEA) believes oil demand will peak in 2040 sustained until then by
developing economies and over reliant industries such as aviation and shipping.
Despite this Shell is spending $1 billion per year investing in the gas markets and its ‘New Energies’ division.
Despite the fact that electric vehicles do not pose an immediate threat, a recent Morgan Stanley report projected that 1 in 3
cars on the road globally will be an electric or non-combustion engine by 2050 and will reduce demand for up to 8 million
barrels of oil per day. Additionally electric car sales are expected to represent 10% of the market by 2025 with a price tag as
cheap as gasoline vehicles by 2023. Norway (2025), Germany and India (2030), and France and the U.K. (2040) have already
announced an end date to the sale of gasoline and diesel cars in the future.
However the key factor in determining the price of oil is unlikely to come from OPEC, Elon Musk or the boom in US
Shale. Much like with the steel and bauxite markets, China has been building the words largest strategic reserve of crude
oil since the late 2000’s and is now estimated to have stored close to 700 million barrels by the end of 2017. This is due
in part to its record breaking daily average consumption of 8 million barrels since January this year. Not only could a fall
in Chinese demand hurt the market and create a rapid oversupply issue, should the Red Dragon feel the need to offload its
already bloated crude storage reserves, an increase in supply would itself saturate the market putting downward pressure
on the price mechanism. Oil is undoubtedly in crisis and some commentators even expect $20/bbl to be the new norm by 2025.
Wind and solar are now cheaper than gas, oil and coal depending on which market is importing and exporting which resource.
Following Trumps departure from the Paris Climate Agreement in 2017 the door is open for China to take the lead on clean energies.
The biggest threat to an oil recover is therefore likely to come from China. In the motor industry Volvo (Chinese-owned) has
announced that all its models will have electric motors by 2019 – China is the largest electric vehicle market in the world.
It seems the fate of yet another market could be in the hands of the Red Dragon and its oil reserves will be a key card
in that pack.