Summary

Mike focused his call on the oil market’s supply/demand situation and the implications for the price of oil and energy equities, noting that since year 2000, OPEC has generally aimed at managing oil prices by managing inventories. For the past 9 months, the analysis of various data sets painted a very bullish picture for the oil market (and energy equities): global oil demand would eventually normalize and resume growth but non-OPEC supply would not see a commensurate rebound. This forecast sees material pressure developing on OPEC output capacity and the prospect for inventories to be drawn down meaningfully to meet market needs. A detailed discussion about the relationship between inventory levels and oil prices followed. Out of the 79 non-OPEC countries, almost 100% of the questions received are about US shale oil. It’s understandable, since over the past 10 years, nearly 100% of all non-OPEC supply growth came from the US. An analysis was presented that had been published starting mid-2019 pointing to prospects for US shale oil production to decline after 2020, a forecast which was brought forward owing to COVID and, more specifically, a contraction in upstream activity that would exacerbate the effects of declines Cornerstone had previously forecast. The Biden presidency was assessed and the executive orders that would affect oil output on Federal lands and waters, the latter being more of a surprise given that pre-election positioning indicated restrictions were not expected to include the offshore. The notion of EV’s “destroying demand” was objected and such prospects seen as being misplaced, discussing the data of the current auto fleet and the growth trends and prospects. While discussing the details of the global supply/demand outlook, a section on a topic called “missing oil” was included, which is a demand under-estimation problem made by the IEA whose oil balance models are basically used by most all brokerage/research firms. A detailed but easy to understand analysis was included about the cause of missing oil and its implications. The crude oil time spreads and a bullish divergence pattern that Cornerstone Analytics highlighted to clients about 5 months ago was noted, a pattern that historically marks an interim price bottom forming (which, in fact, occurred). The time spreads have continued to widen in a manner suggesting bullish sentiment is still building and he discussed the importance of “herd mentality” for the market. Mike spoke on how energy equities trade as a proxy for the commodity, detailing a series of analyses that examining this for the US, Europe, Canada and Australia. Some of Cornerstone Analytics’ models which relate share price performance (absolute and relative values) with oil prices were included.Analysis on how the relative share price performance (i.e. stock prices relative to a broad market benchmark) are nearly perfectly positively correlated with the energy sector’s weighting I the index was mentioned – a phenomenon seen as a self-reinforcing cycle. Details were provided on a compelling case about linkage: oil supply/demand fundamentals directly impact oil inventories that, in turn,impact oil inventories that, in turn, impact oil prices that, in turn, impact energy equity prices (absolute and relative values).

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