Goehring & Rozencwajg Latest Newsletter Pt 16 Mar 2022 10:19
Always a though provoking read https://info.gorozen.com/2021-q4-market-commentary-the-distortions-of-cheap-energy
How could so many people get it so wrong for so long?
As we go to print, the International Energy Agency (IEA) has just announced the largest set of upward demand revisions in its history. For several years, we have discussed how the IEA chronically underestimates demand; these revisions suggest we were right. Despite the significance of the shift, most people were not even aware it took place. After a full decade of investor apathy (or outright hostility), it is difficult to change people’s minds.
What follows is a study of unintended consequences and the impacts of massive capital distortions. For nearly a decade, the energy industry has underinvested in its upstream business; it was naïve to think this wouldn’t have any impact. Oil prices stand at eight-year highs and we believe they are heading higher. How high could crude rally in this cycle? We would not be surprised if prices ultimately spiked to between $150 and $200 per barrel. Natural gas prices reached $300 per oil-equivalent barrel in Q4, and the fundamentals in the oil markets are as bullish, if not even more so. Volatility will likely increase as well. Global inventories are at their lowest seasonal levels ever, leaving us extremely vulnerable to any supply disruption, just as geopolitical turmoil seems to be accelerating. OECD inventories peaked in the summer of 2020 at the height of COVID lockdowns at 4.8 bn barrels – 245 mm barrels more than normal for that time of the year. Inventories are currently down to 4.1 bn bbl – 327 mm barrels less than normal for this time of year. Relative to seasonal averages, oil inventories have never been lower in our dataset going back to 1995.
The headlines make it seem as though the current situation was entirely unforeseeable, but our readers know otherwise. In fact, most astonishing to us is how the current deficit unfolded in slow-motion over two years, receiving no ttention from either investors or policymakers along the way. Oil prices have been rising steadily since April 2020 with only minimal shortterm pullbacks. Nearly that entire time, the market has remained at near-record “backwardation” (future prices below spot prices); a key clue that physical markets were extremely tight. Inventories have been sharply and steadily declining for nearly two years. We estimate the oil market has been in outright deficit now since 2020 by over 1 mm b/d – the most pronounced and most sustained deficit in history. The fundamentals that led to the current deficit (strong demand and lack of capital spending) have been in place for over a decade.
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