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Is the Bull Market for Oil Over?

Cornerstone Analytics

Thu 20 Jan 2022 - 15:00

Summary

During the Cornerstone Conference Call , Mike Rothman discussed how oil market dynamics have evolved since his very non-consensus bullish oil price call back in October 2020, and where things go from here. He examined key drivers behind his outlook which have been almost entirely misjudged by the investment community – namely, lackluster non-OPEC oil production growth featuring his Twilight of Shale thesis, strong oil demand growth still being affected by his  Missing Oil analyses, and OPEC+’s quota discipline related to his insights having attended OPEC meetings for the past 36 years. The paramount question at hand is, “will oil prices keep rallying?” Mike argued “yes.” After correctly forecasting a record inventory draw for 2021, he sees further inventory draws taking place in 2022 and remains set in his out-of-consensus position that OPEC production capacity will be test late this year.

The discussion was focused on oil inventory levels which is what OPEC has kept in its crosshairs. He highlighted the historic April 2020 OPEC+ deal reminding listeners that the group wanted to prevent a cataclysmic build in inventories and to then draw down stocks with the specific aim of managing a higher average oil price. The production deal has resulted in stockpiles falling towards the 2010-2014 average which the Saudis have mentioned publicly as a target. Mike discussed the Saudi annual budget and oil prices. He talked about the outlook for oil demand amidst the effects of COVID and ESG/anti-carbon policies. He noted that expectations for the pandemic to become endemic which will result in global oil demand surpassing pre-COVID levels. 

The next deliberation was on the background to the “missing barrel” issue which is related to the IEA underestimating global demand. The underlying problem hinges on the IEA’s flawed estimation of emerging market oil demand which has been a chronic issue since Mike first attended OPEC meetings in the mid-1980s. Mike notes that Cornerstone Analytics’ demand estimates are close to true oil consumption levels while the IEA’s demand figures – both historic and forward looking – are simply too low. As almost all investors and energy analysts simply repackage the IEA’s published figures making consensus demand figures (and the resulting demand for OPEC oil) too low. 

He also discussed the US shale oil outlook and the general challenges for all non-OPEC supply growth. He noted that global CapEx budget have been cut by $2.2 trillion since the 2014 high watermark and sees that making non-OPEC gains a challenge, a challenge which will be made even more difficult by anti-carbon lobbying. Additionally, the rather misunderstood short-life span of shale oil production will mean further lackluster US production growth, which ultimately will contribute to lackluster non-OPEC production.

Mike made a point of noting that the medium term forecast he’s advised clients about for the past 15 months centered on a view that non-OPEC supply will not see the same sort of rebound as global demand post-COVID. The view doesn’t change even with oil prices rallying towards the $100/barrel figure he called for over a year-ago. He argues that some potential supply responses such as meaningful additions of Iranian barrels to the market aren’t likely since he doesn’t see a perceived a change in White House policy.

Lastly, the discussion ended on point of noting the outsized energy equity rally that’s occurred since he made his call in October 2020 to aggressively enter the space, and how he see the energy equity rally as being in a multi-year cycle.

Topics

Like at the start of 2021, we have a counter-concensus call on the oil market outlook

On the back of the largest ever stock draw in ‘21, we review the favours suggesting inventory draws occur in ‘22

Implications are discussed for oil prices and energy equities