Will OPEC+ Save The Global Oil Market?

June 29, 2021 12:00 PM
The Covid-19 Delta variant could become a real issue, but it may still be too early to tell
In the U.S., we expect to see crude supplies fall once again
Electric cars might not be as climate-friendly as we think
Energy Report

Energy Report

The Phil Flynn Energy Report 

Will OPEC+ Save the Global Oil Market?

The global oil market is tightening at a frantic pace and the big question is, will OPEC+ rise to the occasion and save the world from an oil price spike? 

Concerns about China raising the retail cost of both gasoline and diesel, along with worries about the spread of the Covid-19 Delta variant, are raising questions about the potential to hurt demand. The reality is that the global oil market is facing a looming supply deficit. China's move to raise prices is a desperate attempt to slow demand as they spin out of control. 

On the other hand, the Covid-19 Delta variant could become a real issue, but it may still be too early to tell. Experts are mixed on this issue and whether or not it will lead to another round of economic shutdowns. So for now, while the risk is there and should be watched, it’s simply too early to decide whether or not this will have any meaningful impact on oil demand growth.

Now, while those concerns about demand may be well-founded, the reality is that right now in the here-and-now, oil demand is through the roof! That’s why oil traders are going to be watching very closely what OPEC+ decides to do. As we've been warning for months, they must respond to higher demand because the world is facing a potential supply deficit unless OPEC+ decides to raise output. 

We heard earlier that OPEC+ was going to raise production in the area of 500,000 barrels per day (bpd); now there’s talk that the increase could be as much as 1 million bpd by the end of August. The reality is that we probably need the higher end of what OPEC is talking about to have a chance at keeping oil prices under control and supplies ample enough.

In the U.S., we expect to see crude supplies fall once again. I believe that we could see oil supplies fall by 5.5 million barrels this week. We also expect to see a drop in gasoline supplies to the tune of about 3,000,000 barrels. We anticipate a drop of 2,000,000 barrels for distillates, and as far as refinery runs, we look for them to bounce back by at least one percentage point. 

The natural gas injection may only be 55 BCF. Anyone who’s been watching the natural gas market realizes this market has been supported by the record-breaking hot temperatures that we've seen in many parts of the country. The pace at which we’re seeing U.S. oil inventories fall should be a wake-up call. The U.S. is becoming more dependent on oil imports as U.S. producers fail to respond to higher prices. The energy independence that was so hard for us to achieve is now being lost.

For environmentalists, this is a win: they believe that to save the planet we have to reduce our usage of fossil fuels. One way the Biden administration proposes to do that is through the electrification of the government auto fleet and by pushing to become a nation with more electric cars. The problem is that there are more reports that claim electric cars aren't necessarily cleaner or better for the environment than the cars that we’re driving now.

According to the latest report from Reuters, an analysis of the data from a model that calculates the lifetime emissions of vehicles is suggesting that electric cars aren’t as climate-friendly as we might think. 

The model was developed by the Argonne National Laboratory in Chicago and includes thousands of parameters from the type of metals in an electric vehicle (EV) battery to the amount of [aluminum] or plastic in a car.

Argonne’s Greenhouse Gases, Regulated Emissions and Energy Use in Technologies (GREET) model is now being used with other tools to help shape policy at the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board, the two main regulators of vehicle emissions in the United States.

Jarod Cory Kelly, principal energy systems analyst at Argonne, said making EVs generates more carbon than combustion engine cars, mainly due to the extraction and processing of minerals in EV batteries and production of the power cells.

But estimates as to how big that carbon gap is when a car is first sold and where the “break-even” point comes for EVs during their lifetime can vary widely, depending on the assumptions.

Kelly said the payback period then depends on factors such as the size of the EV’s battery, the fuel economy of a gasoline car and how the power used to charge an EV is generated.

Reuters plugged a series of variables into the Argonne model, which had more than 43,000 users as of 2021, to come up with some answers.

The Tesla 3 scenario above was for driving in the United States, where 23% of electricity comes from coal-fired plants, with a 54 kilowatt-hour (kWh) battery and a cathode made of nickel, cobalt and aluminum, among other variables.

It was up against a gasoline-fueled Toyota Corolla weighing 2,955 pounds with a fuel efficiency of 33 miles per gallon. It was assumed both vehicles would travel 173,151 miles during their lifetimes.

But if the same Tesla was being driven in Norway, which generates almost all its electricity from renewable hydropower, the break-even point would come after just 8,400 miles.

If the electricity to recharge the EV comes entirely from coal, which generates the majority of the power in countries such as China and Poland, you would have to drive 78,700 miles to reach carbon parity with the Corolla, according to the Reuters analysis of data generated by Argonne’s model.

The Reuters analysis showed that the production of a mid-sized EV saloon generates 47 grams of carbon dioxide (CO2) per mile during the extraction and production process, or more than 8.1 million grams before it reaches the first customer.

By comparison, a similar gasoline vehicle generates 32 grams per mile, or more than 5.5 million grams.

Michael Wang, senior scientist and director of the Systems Assessment Center at Argonne’s Energy Systems division, said EVs then generally emit far less carbon over a 12-year lifespan.

Even in the worst case scenario where an EV is charged only from a coal-fired grid, it would generate an extra 4.1 million grams of carbon a year while a comparable gasoline car would produce over 4.6 million grams, the Reuters analysis showed.

My question now becomes this: even though it’s slightly better over time, is the difference in carbon emissions savings enough to make a wholesale change away from the internal combustion engine? Have we thought about the impact on the environment when we have to build all these batteries and mine for all these minerals? Is the net effect going to be worth the economic hardship it'll put on the average citizen? Have we thought about the waste that's going to come from all these spent batteries? 

In the meantime, the majority of the world is going to be using gasoline for the foreseeable future.

Don’t miss out on my wildly popular trade levels on all major markets, as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.