Oil is hitting an 'invisible price ceiling'

CNBC • September 23, 2016 • by Nansen G. Saleri

The often accepted paradigm that crude prices are cyclic and it is only a matter of time before we see a sharp rebound is being disparaged by the ruthless realities of energy markets. Low prices and less volatility are likely to continue.

The age of cyclicity may have already ended due to a shift in energy fundamentals including concerns about global warming. It is true that compared to other commodities such as gold, platinum, copper or coffee, crude oil has exhibited a higher degree of volatility going back several decades. Since 1996 crude prices have fluctuated as much as seven-fold, peaking at $148/barrel in mid-2008.

Gold, platinum, and copper followed similar trends, albeit with slightly less varied responses. Hopes for a rebound in prices before year-end are fading. Even for 2017 prospects for Brent crude firmly above $50 are less than 50/50 barring a production pullback by OPEC and Russia or a "black swan" event affecting global markets.

Some experts will argue that geopolitical factors vastly differentiate oil and gas imparting an unavoidably high volatility to market pricing. That may well have been the case historically but the future promises to be different. The reasons – a confluence of three factors, namely growing crude supplies, increasing alternatives to crude (including gas and renewables), and a softening demand for fossil fuels dampened by climate concerns on one hand and energy-efficient consumers on the other.

We are witnessing the genesis of a clean energy ecosystem that is more market-driven and less susceptible to nonmarket forces than ever before. The defining characteristic of the new ecosystem is that it is based on a competitive platform of "clean" kilowatts. This does not mean the end of OPEC or super-majors, only that they have to compete in a far more crowded, mixed, and diversified field of energy providers.

The source of these kilowatts – oil, gas, wind, solar, or clean coal – matters less. (The power grid fueling electric cars blurs any distinctions). Affordability and public perceptions of environmental harm matter most. Advantage light oil, wind, solar, and gas. Bad news for conventional coal and tar sands. Thus the real battle being waged by and within OPEC will be as much about the crude's share in the total energy pie as what share each country will have within the global oil basket. What it means for oil is an invisible price ceiling that is well below its past peaks.

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