I wrote a blog a year back that it is unlikely for crude oil to touch $100/barrel and rather it would start coming down to the level of $60, when most of the analysts from top investment banking/FIIs were predicting crude crossing $100. Since crude price had gone up from $60 to $85 in short span that time, they were playing mainly on sentiments and not on fundamentals, which I had explained in my blog. I presented the case in few National/International conferences and I was happy to be proven right, since crude oil has hovered mainly around $60~65 in last 12 months.

A decade-long boom in domestic extraction, thanks to shale gas revolution, has turned the United States into the world’s largest oil producer. As a result, though Iran supplies are reduced in International Market in last 12 months, USA could pump in more oil to support the demand markets globally. Incidentally Global economy has been slowing down in last few quarters, which means that OPEC can’t think raising the prices, by cutting down the production. Hence Saudi Arabia, the largest member of OPEC, couldn’t afford to take time in normalizing their production after recent drone attack. They knew that if they take their time to restore supplies, world is not going to wait for their supplies. It hardly impacted the crude pricing during that time. Such long supply market and resultant stability of oil price augurs well for India, a third largest importer of Oil.

There is one more strong reason to believe that prices could stay at $60~70 level short term, before it starts coming down gradually over next 5 years. The reason is the emergence of Electric Vehicles at the global stage. It is pertinent to mention that EV is not going to replace IC Engine Market overnight and in my view, it could reach only 30% of total Automobile Market over next 12~15 years, due to Infrastructure bottlenecks, Limited capacity of Electricity generation, Preference of household over EV for local governments in terms of energy security etc. In a conference at Singapore last week, I presented some data on EV(reflecting 30% by 2030) and there was a consensus on these numbers from the members of USA, China, European countries.

China has taken a giant step in EV and currently they are the market leader in Electric Vehicles. Recognizing the huge need of electricity required to run the vehicles, apart from setting up thermal plants running on coals, they have invested a lot in wind farms all across the country, since wind energy(renewables) is one of the cleanest forms of energy. China now produces 45% of Global wind energy. Realizing that Lithium-ion batteries are the cheapest one for EV at present, they have gone and bought Lithium mines in various parts of the world. Lithium will be new crude oil. Interestingly crude oil can be sourced from various countries/companies, whereas China will control the market of Li-ion. This is the most worrying factor for EV manufacturers in the world(and Countries investing in EV ecosystem),unless they find a cheaper material than Lithium for batteries.

In India, short-term, we are likely to burn more coal in thermal plants to electrify vehicles to bring down pollution in the cities. That is not going to be sustainable and certainly not eco-friendly solution. India is taking some good steps to enhance energy security thru’ renewables like Solar, Wind, apart from investing heavily into Gas, but we have long way to go.

In terms of EVs penetration in India, my assessment is that 2 and 3 wheelers will be moving to EV quickly over next 5 years, however for Passenger cars, Hybrid EV could be first, before we move to Battery EV. Commercial trucks will take much longer time. I will run an article on EVs over next few weeks, since it will impact Petroleum( Fuels and Lubricants) and Component Industry and needs to be covered in details for the benefit of readers.

The purpose of giving some insights on EVs in this article was to help readers understand that demand for Petroleum products is going to remain robust globally(and in India) ,since ICE are not going to disappear for next few decades. At the same time, EV is going to put pressure on Hydrocarbons, which means oil producing nations will not dare to increase the prices at their will, like in the past.

Majority on the road will be still IC Engines running on Gasoline/Diesel. That is why companies like Exxon Mobil, Saudi Aramco are still investing a lot in Hydrocarbons. Closer home here in India, Govt.is pushing for huge Fuel refinery(60mT capacity) in West Coast. Look at the investment US is still making in Shale Gas and LNG terminals. So oil will stay for considerable future.

I am not an astrologer, but going by the fundamentals, my assessment says that oil is expected to remain in the band of $60~70 short term, before it comes down long-term. Interesting times. Isn’t it?

© Shailendra V. Gokhale 171119