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Oil markets, OPEC, enter the endgame for the Age of Oil

Oil markets
By Paul Hodges on 23-May-2021

2 major events shocked oil markets last week. They marked the start of (a) the endgame for the Age of Oil and (b) the paradigm shift to the Circular Economy and the new Age of Energy Abundance. 

The new ‘Net Zero by 2050’ report from the International Energy Agency (IEA) was the first shock:

  • It was set up in 1974, during the Arab Oil embargo, when motorists queued around the block for hours to fill up their tank. The UK government even issued World War 2 ration books to help allocate supplies
  • Since then, they have only ever been asked the question, ‘what are the risks to energy security?’ Nobody ever wanted to go through that disaster again
  • And of course, the answer to that question was almost by definition, ‘more of the same. The world needs high prices to justify the replacement of oil and gas reserves and provide spare capacity for growth’

But now, for the first time, the UK government has asked a different question ahead of November’s COP 26 in Glasgow. For the first time, the question was: ‘is there a path to net zero by 2050 which maintains energy security?

The IEA’s answer not only confirmed the answer is ‘yes‘. It also warned that there is no time to lose. We have to start today. And the good news (for everyone by oil/gas producers) is that:

“The world’s first comprehensive energy roadmap shows government actions to rapidly boost clean energy and reduce fossil fuel use can create millions of jobs, lift economic growth and keep net zero in reach.”

And then there was the second shock, which provides the catalyst for the start of the paradigm shift.

The world is now looking at a rapid move to oil market over-supply, as Iranian oil returns to the markets. As Russia’s chief negotiator for the Iran nuclear deal tweeted last week:

“The JCPOA participants at their meeting today noted that “good”or “significant” progress was made and that an agreement is “within reach”.  The Joint Commission will resume its work early next week. Hopefully the 5th round will be final.”

This will almost certainly mark the end of the recent oil rally, which was already running out of steam as the chart confirms:

  • But this is not a conventional boom/bust oil cycle, where high prices led to a demand slowdown and output increases, to be followed by over-supply and price collapse
  • The current cycle will instead be the last of its kind, following the model established by the former “King Coal” – which ended with large reserves being left in the ground
  • The move to Net Zero means the end of the Oil Age.  Oil and gas will be left in the ground, as it is no longer needed
  • It also means that market share is now the key issue for producers, as “Winners” will be those who manage to monetise their reserves whilst these are still needed

OPEC faces a “make or break” meeting next month. Does it reduce output to support prices as Iran returns? Or will its members recognise the need to sell oil whilst they still can, as the world moves to a Circular Economy and an era of Energy Abundance?