Recently, I've written repeatedly over how the medium-term outlook for oil and by extension energy prices is weak thanks to structural changes affecting the black gold's value.
In fact just today shares in LNG producer Santos Ltd (ASX: STO) hit a 16-month low of $2.99 as benchmark oil futures trade at 7-month lows, as global crude production again exceeds supply.
Both WTI and Brent crude oil benchmarks are down 15% since May and have been in a downward trend for nearly three years thanks to a number of factors I outline below.
The winners from permanently lower oil prices are the fossil fuel consumers such as Qantas Airways Limited (ASX: QAN), manufacturer Amcor Limited (ASX: AMC), or diesel-powered ferry business Sealink Travel Group Ltd (ASX: SLK).
Below is a chart of the four companies' share price performance since June 2014.
Chart: Qantas, Amcor, & Sealink v Santos share price performance over past three years
Note how the end of 2014 sees the share prices diverge in opposite directions after OPEC was forced to fight U.S. shale energy producers head on by oversupplying markets in an effective admission that it had permanently lost its cartel-like grip on oil prices.
Below I reiterate some warning signs that oil prices could fall far lower over the next five years.
U.S. shale oil – new extraction technologies in the U.S. have brought unthinkable amounts of new supply onto the market and are continuously lowering the marginal cost of production in a structural change that has permanently floored oil prices.
Even OPEC knows oil's going lower – old supply controls have been largely abandoned since 2014 and the organisation itself is predicting medium-term demand for fuel for motorised transport will actually fall in developed economies thanks to the rise of electric transportation. This is not rocket science.
The Saudis know oil's going lower – they're in a race time to sell off their most valuable oil asset in the Saudi Aramco Company in what might be the world's biggest IPO, before prices really take a turn for the worse.
President Trump and the Republican Administration – are happy to see oil lower and OPEC wrecked. Here's what Trump told CNBC about his thoughts on OPEC in 2008: "Every time they lower interest rates the cartel, because I call it a cartel, the illegal monopoly, raises oil prices. So the monopoly, because that is all it is, it's a total illegal monopoly — if businesses ever formed OPEC, everybody would be put in jail — here they are, and every time a country hits oil, they are invited into the cartel. It's a disgrace".
Rising US dollar – this is a negative for oil that is priced in U.S. dollars.
Renewable Energy – another elephant in the room, as electric cars, wind, solar and tidal power are all heavily supported by Western governments.
In fact just about the only (sane) people still bullish on oil prices are the energy analysts on Wall Street and industry executives. And that's because they're paid to be.
You won't catch me betting against the Saudis as to which way oil prices are heading over the next five years.
