Is energy market in a commodity bubble, or are fundamentals supporting prices?

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Highlights

  • Crude oil is trading 50% below its all-time high.
  • EVs, battery storage, renewable energy will still take time to replace conventional sources.
  • Stock markets round the globe rebounded sharply after initial pandemic shocks, given fundamentals, a section of market analysts believe that the market is in a bubble.

Electric vehicles are gaining popularity worldwide as they have evolved technologically to offer better range at competitive prices without compromising on looks or features. Interestingly, the first electric car dates back to the 1800s and first operational electric car made its debut in the United States in 1890. Despite an early start, EVs could not capture the global transport segment in a meaningful way.

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Good read: Why are crude oil prices on fire in 2021?

The point here is that even after 200 years, we could not get rid of our dependance on fossils fuels. Deep down, we all love the roaring sound of the gas guzzling engines producing enough horsepower to accelerate the car from 0 to 100 km/h in few seconds.

However, over the past decade or so, the acceptance of EVs is gaining momentum. Europeans are taking lead in promoting battery-operated vehicles. China is also making serious efforts to develop faster and efficient EVs backed by reliable battery technology.

According to the data published in Resources and Energy Quarterly June edition, the sales of EVs jumped 126% on Y-o-Y basis during the March quarter. Nearly 3 million units were sold in 2020 and 4.4 million are forecasted for the year 2021. By the end of 2030, the demand for EVs is anticipated to be around 26 million units.

So, the big question is- Does increase in the sales of EVs marks the end of crude oil era?

The answer is No! The demand for crude oil is not going to be depleted soon. Liquid hydrocarbons are major raw material for numerous industries with the transportation sector being the largest consumer of gasoline and diesel. Even though EVs are gaining traction, it should be noted that most of the countries are still far from developing infrastructure to support the plug-in system.

Related read: 5 ASX solar stocks powering the green energy sector

Equity markets rebounded ferociously after the meltdown of 2020 to hit fresh highs, making many investors uneasy of the market valuation. Fears of bubbles are creeping into the minds of many market participants. 

Commodity prices including crude oil, copper, iron ore, coal have moved significantly from their lows of 2020. Last year, we saw that to curb the spread of COVID-19, many countries across the globe went into lockdown mode, pushing crude oil futures price to trade in negative in April 2020.

That was first such incidence in the history of oil trading. The spot price of crude oil slumped to ~US$20/bbl in the absence of demand. However, the OPEC+ countries swung into action and took corrective measures such as 10 million bpd cut in production, thus slowing the supply. Furthermore, the record pace at which vaccines were rolled out also helped the crude oil market participants to gain confidence and set the tone for the crude oil price recovery. From the lows of 20s, WTI crude oil crossed US$75/bbl mark last month.

Related read: Crude Oil Rallies to 10-Month High After Production Cut Decision

WTI futures price for last 1 year (Image source: Refinitve |Analysis: Kalkine Media)

Is more strength left in crude price?

Despite crude oil prices moving over 200% from its 2020 bottom levels, it is still 50% below its all-time high prices. The following factors should be taken into account before forming any view on the current prices of crude oil.

  1. Prices are still way down from their all-time high
  2. Known reserves of crude oil are depleting
  • The USA and Europe are putting sanctions on hydraulic fracturing.

Related read: BP expands dividend; how are O&G companies performing amid crude oil’s bull run

WTI futures price for last 1 year (Image source: Refinitve |Analysis: Kalkine Media)

Electric or hybrid cars may eventually capture the market, but it could take some more time. The known reserves of crude oil are depleting, while the shale boom in the USA seems to reach the saturation point. However, the escalating tensions in Afghanistan could also have an impact on the political equations in the Middle East and impact the crude oil supply.

Based on the current data and trends, it could be said that in short to medium term, the prices of crude are high but not in bubble zones. Renewables might replace the conventional sources of energy, but nothing is going to change overnight.  

Related read: Four ASX oil stocks that grew over 150% YTD  

Bottom line

Within the commodity space, the metals and mining sector is going through a commodity supercycle phase. The energy market is in the midst of a transition, from non-renewable to cleaner renewable energy, be it solar, wind or tidal. However, a complete transition will take time. Crude oil is here to stay for a little longer period and will be phased out may be in a decade or two.



 


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