Is Oil Really Dead?

Jeff Malec profile picture
Jeff Malec

How big of a threat are renewable energies and electric cars to the oil industry and oil prices? It's a question more than a few investors have an interest in answering, given that the Energy sector is about 6% of the S&P 500 market capitalization (which is down from around 16% in 2008). Technological advances in the oil industry and renewable energy are changing the way we produce energy, with some oil companies having reduced the cost to produce oil almost in half. Meanwhile, renewable energy (wind and solar) is the fastest growing energy sector.

We're perfecting the art of generating energy, but does that mean that renewable energy will soon overtake oil over the next couple of decades? Jeremy Grantham thinks so, saying we've hit peak oil from the other side - meaning it's going to become irrelevant eventually. Here's his quote on ESG investing (Environmental, and Social Governance) via Josh Brown:

You can divest from oil-or about anything else-without much consequence for performance. Yet today, the rationale for divesting from fossil fuels isn't just about aligning with an investor's values, it reflects a forward-looking view that these industries are in long-term decline and their reserves will become stranded assets.

Oil may have a last hurrah before the electric cars arrive, but when they do, there will be some tough times for a long time."

We recently had a chance to sit down with Emil Van Essen (see part 1 here) to get his take on all things oil, and started things off with just this question…. What happens when the electric cars take over? His quick take, renewable energies may be making gains, but oil production isn't going anywhere anytime soon. Van Essen says the demand for oil will come from the developing world and electric cars are but a blip on the bigger radar:

The amount you save off the electric car coming on - is just a drop in the bucket in comparison. For the new 15 to 20 years, there's going to be a growth of a million barrels of oil per day in the demand for fuel.

The fact is there's a lot of new cars coming out in the developing world every year and they are gas and diesel. Sub 1 percent are electric. If that sub one percent goes to one percent, two percent - it won't change things all that much. Plus, generally, impractical. There are big problems with the battery they haven't solved yet. The Cobalt - with the lithium. They don't know where they are going to get the supplies from for battery power. They are not good for long distance transportation.

What percentage of electric cars would there need to be to make a difference?

Maybe they go up to 5% over a 20-year period.

It's not just cars that need the energy to run. What are your thoughts on renewable energy powering a city?

If you want to take a city like Chicago and polar it off solar power - it's never going to happen. They are good ideas - Technology is improving for solar and wind, but essentially the growth in renewables is going to go up fast, but the growth in terms to natural gas, or oil is going to be small.

Let's shift to crude prices themselves. There have been mountains of articles written about rising oil prices, but what should investors be looking at? What drove crude oil prices this year?

I think oil prices are higher than they should be long term, but in the short run, we are seeing a number of circumstances that are driving prices higher.

We have Iran being driven out of the market in the next 180 days, we have Venezuela being pushed out of the market, and we have very strong demand for oil, and OPEC really sticking with its quota system. This is resulting with a decline in storage level and driving up prices.

Technology is improving and the cost of producing is going down - prices right now are considerably above the cost of production and they will probably in time, drive down prices.

There is a new China crude oil contract. What is the supply and demand looking like in the east?

China in terms of demand for oil is one of the key factors. I think when prices went up, they allowed their inventories to go down, because they thought there was going to be a correction. Now, the inventories in China are too low and they are going to have to buy, which is part of the reason oil has been so strong. The recent price drop has been a result because I think Russia and some others are going ramp up production.

WTI and Brent historically have been divergent from each other in price. This changed in 2015 when President Obama announced the U.S. would lift the ban on exporting crude oil. This caused the divergence in price to all but disappear. But now in 2018, we are seeing the spread between WTI and Brent prices as high as $11. Can you speak to that?

The divergence - we call it "the arb" of WTI Brent differential. WTI has fallen considerably below Brent. The main reason is because all of the supply is coming out of the United States. All the Shale oil is light sweet and it's all coming out of the Dakotas. The US doesn't need this supply, so it's all for export. Meanwhile, demand is high because of the sanctions. So, there is tightness in the Brent market, and supply in the WTI market. The market must adjust to the pipeline cost, the tanker cost to get to wherever it is going.

The other factor is they are running into some pipelines constraints in the United States. They can't necessarily get it out, which actually makes WTI fall even lower. The transportation costs are say five dollars, then it's actually the differential falling below ten. I don't think that's sustainable.

Can you speak a little to Crude oil being in backwardation and what that means?

We were in contango because there was too much supply. OPEC started adhering to its quotes, storage levels came down, demand went up, economy was really strong, all of the sudden we are in backwardation. Backwardation just means there's supply and demand tightness. But we will continue to see prices go from backwardation to contango and back again as supply and demand changes.

Cushing, Oklahoma: where all the crude oil is stored. At least, that's how it used to be. Now, it seems like a mere stop off point. Why is Cushing becoming less significant?

Cushing is becoming a non-factor. Because of the growth in Permian - really the oil isn't flowing through Cushing anymore. A lot of the oil from Canada is going to Midwest refineries. The Permian is going to the gulf coast. Cushing is becoming a stop off point, along the way. The problem comes - your pricing in Cushing compared to WTI - if a pipeline breaks down - and you can't make a delivery in Cushing - you'll see a big space - potentially in the summer driving season.

Can the Dakotas get all that nat gas to China and India?

The biggest problem they have is takeaway capacity for natural gas. By some point in 2019, they are going to run out of takeaway capacity and they thing the hub in wauhau (not sure what this is) is going to show a zero bid because they are going to have more gas than they have pipelines.

In oil you can rail it and truck it - but natural gas - you have to pipe it - and Permian is drilling so much there's not enough space.

Emil Van Essen knows a thing or two about the energy sector, recently launching an MLP investment, designed to capture returns on the growing infrastructure in the energy sector.


The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self-reporting, and instant history.

Managed futures accounts can be subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules. The disclosure documents contain a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investors interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

This article was written by

Jeff Malec profile picture
Jeff Malec is the CEO and founding partner of Attain Capital Management ( - a commodity futures brokerage and research firm specializing in managed futures investments through individually managed accounts and privately offered funds. Please read the important disclaimer regarding managed futures below: Disclaimer: Composite performance records are hypothetical in nature, and the trading advisors have not traded together in the manner shown in the composite. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any multi-advisor managed account or pool will or is likely to achieve a composite performance record similar to that shown. In fact, there are frequently sharp differences between a hypothetical composite performance record and the actual record subsequently achieved. One of the limitations of a hypothetical composite performance record is that decisions relating to the selection of trading advisors and the allocation of assets among those trading advisors were made with the benefit of hindsight based upon the historical rates of return of the selected trading advisors. Therefore, composite performance records invariably show positive rates of return. Another inherent limitation on these results is that the allocation decisions reflected in the performance record were not made under actual market conditions and, therefore, cannot completely account for the impact of financial risk in actual trading. Furthermore, the composite performance record may be distorted because the allocation of assets changes from time to time and these adjustments are not reflected in the composite. Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history. Past performance is not necessarily indicative of future results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client's commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

Recommended For You

Comments (8)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.