Is the bull market for oil coming to an end?
Michael Rothman
The short answer to the above question is “no.” In point of fact, an assessment of the underlying supply and demand fundamentals suggests that we are in a multiyear up-cycle for the oil market.
At the center of this analysis stand two critical data considerations with the first being the stickiness of petroleum in the global energy equation. While there is a literal tsunami of anti-carbon sentiment, the fact is oil will remain an integral part of world needs for several decades.
Most observers do not realize that carbon-based fuels account for 85 percent of global needs, and these same observers are unlikely and/or unwilling to revert to a standard of living that likens the Stone Age. There is simply not a substitute of scale available to replace petroleum in our everyday lives. As the world continues to recover from the pandemic, so too will the demand for oil with consumption then likely to expand at around 50 percent of the rate of global gross domestic product.
As a point of information, fears being expressed about the newest variant impacting demand stands in sharp contrast to the fact that global oil consumption for November topped 100 million barrels per day. This represents the highest monthly figure since February 2020. It coincided with a monthly draw on inventories that was about nine-times larger than normal.
As a point of information, fears being expressed about the newest variant impacting demand stands in sharp contrast to the fact that global oil consumption for November topped 100 million barrels per day
The second critical data consideration relates to oil output from the non-OPEC countries. In contrast to the expected recovery and secular upward gains in global oil demand that we foresee, oil supply from these non-OPEC countries is not expected to show a commensurate rebound. Since the 2014 high watermark, capital expenditures on oil production have contracted sharply. Through the end of the current year, spending cuts totaled $2.2 trillion. Moreover, anti-carbon pressures will manifest in a continued underinvestment of production capacity.
This combination of constrained upstream activity in the non-OPEC countries and secular growth in global oil demand will intensify already bullish pressures on OPEC’s available output capacity and global oil inventories. Such a scenario is not discounted in the oil market or in the price of energy equities. As a matter of discussion, concerns surrounding the latest COVID-19 variant manifest in oil prices that are significantly below their current “fair value.” So, what is the current fair value? Like a fine watch, there are many moving parts when it comes to the global supply/demand equation. The nexus of all these oil balance factors is storage. Petroleum inventories in the OECD countries are the proxy for global inventories, which is why there is a strong inverse relationship between storage levels and crude prices. Based on our most recent figure for inventories, Brent crude has a “fair value” of just over $96 per barrel. This is $22.50 per barrel higher than last week’s closing price. Discounts (and at times premiums) to fair value are not a unique occurrence. The current spread speaks to the impact of angst about omicron and, we wonder, some “X” factor like the interest rate climate causing concern about the global economic outlook.
The writer is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research.
