Summary

Mike started by showing that pandemics have not been “black swans” for oil, with COVID being the exception to that rule. The rapid fall in oil prices this year was initially due to a Saudi-led price war which was then followed by an economic shock from the pandemic. Oil demand actually held up in the first two months of 2020. Mike noted that there are 3 “real” prices of oil: a price that “kills supply” (which is below $35), a price that “OPEC acts to defend” (which typically centres on the Saudi budget), and a price that “kills demand” (which is north of $120). On global demand, Mike noted that mid-to-late-March saw daily global air traffic collapse rapidly by 75% - unprecedented. Also in late March, US oil demand fell by 35% but he noted it is incorrect to extrapolate the figure to a global number because the correlation between the US and rest of the world is literally close to zero. This is due to the dominance of non-OECD consumption which accounted for 94% of all demand growth these past two decades. As to the oil supply cuts ratified by OPEC+ on 12th April, Mike noted that they were the largest on record, but implementation was delayed - if they were serious about stemming the excess reduction the cuts would have been implemented immediately. Do not expect high compliance from nations for a number of reasons outlined. He noted that the Saudis have been giving mixed signals - for instance, this month crude exports to the US will be the highest in 6 years. Mike noted the various uncertainties to contend with on demand and forecast 2Q ’20 will see a contraction of 13m barrels a day (YoY) - half the amount that the IEA projects. Almost all of Wall Street research is based on the IEA report, but there are several issues with this data. He discussed “missing oil” which actually reflects demand underestimation - it never shows up and the IEA always ends up revising up its demand series. Mike sees US crude oil production declining sharply this year, a view that most believed impossible 6 months ago. Shale oil has been viewed as the saviour for global supply, but Mike was never in this camp (he actually talked about the “twilight of shale”). He made note of a little discussed, but important fact, that shale is literally the “wrong crude” for the US refining system which is why significant export capacity is still being built out for sales to Emerging Markets. For the medium term, Mike fully expects global oil demand to recover, but non-OPEC supply will take considerably longer to recover and it will not be by nearly as much. Additionally, the market faces a host of supply risks in OPEC - not just Venezuela and Libya, but Iraq, Nigeria and even Saudi Arabia. In Q&A, Mike spent time talking about a misplaced view about oil demand “being destroyed” over time by electric vehicles. There are 5.5m electric vehicles compared with a global fleet of 1.3bn gasoline or diesel powered autos. Aside from oil being a lock as a transportation fuel, he discussed the near perfect inelasticity of oil used for petrochemicals.

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