Elon Musk may have delivered more cars than expected in Q1, but investors should expect a sharp decline in sales moving forward. | Source: AP Photo / Susan Walsh
- Electric vehicle sales are indirectly correlated with oil prices.
- A failure by OPEC+ to cut production significantly and boost oil prices is bad for Tesla.
- EV sales are expected to fall dramatically this year.
Elon Musk knows many consumers will suffer sticker shock the first time they see just how expensive the “low-cust” Model 3 really is. That’s why Tesla’s marketing shtick trumpets the alleged savings of never having to buy gasoline ever again.
The Model 3 order page boldly quotes both a purchase price and a “price after estimated savings” that currently teases a $4,000 pseudo-discount.
Prospective Model 3 buyers are told they’ll save thousands of dollars by driving an electric vehicle. | Source: Tesla
What the fine print reveals is that these alleged savings are calculated based on a gasoline price of $2.85 per gallon. With oil prices ranging near 17-year lows, this marketing tactic will likely fail to persuade new buyers to open their checkbooks.
Hopes were high that the recent deal passed by OPEC and its allies would push oil prices higher. That optimism seems to be fading. For Elon Musk and Tesla, this is bad news.
Why Tesla needs high oil prices
While prices are declining, electric vehicles are still considerably more expensive than conventional gasoline-powered cars.
Some buyers may purchase them solely to help out the environment, but simple math drives most car-buying decisions. Many consumers won’t purchase an electric vehicle unless they believe it will save them money over the long run.
With nearly 25,000 U.S. gas stations currently selling gas for less than $1.50 per gallon, electric vehicles have suddenly become a hard sell.
A coronavirus-fueled demand shock has ignited a firesale in crude prices. And some analysts warn that the outlook for the EV space is grim.
Analyst warns EV sales are heading over a cliff
Wood MacKenzie predicts that electric car sales will plunge by 43% in 2020, partly due to lower oil prices.
The U.K. firm explains:
The coronavirus outbreak, potential delays to fleet purchasing due to lower oil price and a wait-and-see approach to buying new models have all contributed to this decrease in projected sales.
Global Data reached the same conclusion last week, arguing that with EV buyers having to wait longer to enjoy the cost savings from not having to buy gas, sales will inevitably fall.
The firm’s automotive analyst, Mike Vousden, wrote:
…low oil prices will lead to a longer waits for the reduced fuel costs offered by electric vehicles (EVs) to amortize their higher purchase prices.
Why OPEC+ mandated production cuts won’t work
If there’s any person or entity who needed the OPEC+ oil cuts deal to work more than Donald Trump and the U.S. shale industry, it is Elon Musk.
Unfortunately for Tesla, the OPEC+ deal doesn’t look like it will shore up oil prices.
Brent crude futures are hovering just above $30 a barrel. | Source: TradingView
After the announcement of production cuts totaling nearly 10 million barrels per day (bpd), Brent crude futures went up to nearly $37 a barrel.
Yet Brent has retraced to $30, a drop of around 20%. All indicators point to the downward trend continuing.
Why oil prices won’t come to Tesla’s aid
Wall Street sees the deal as too little, too late. Goldman Sachs denigrated it as “insufficient.” French bank BNP Paribas was equally dismissive.
Oil prices are likely to remain subdued because the production cuts are not enough to offset the drastic collapse in demand, which is two to three times as large as the 9.7 million bpd supply cuts. It’s unclear when manufacturing and travel-related oil consumption will recover to pre-January levels.
And besides floundering oil prices, Tesla will have to contend with a general decline in the demand for consumer discretionary goods as the coronavirus pandemic ravages the world.
Musk may have delivered more cars than expected in Q1, but investors should brace for a sharp decline in sales moving forward.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
This article was edited by Josiah Wilmoth.