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In their report, the IEA revised non-OECD demand higher by nearly 1 m b/d every year going back to 2018. Beginning in 2010, the IEA has now underestimated global oil demand in 10 of 12 years (leaving aside 2020) by nearly 1 mm b/d each year on average. This is a systematic problem with their methodology and yet few people openly acknowledge the ongoing errors. As recently as 18 months ago, conventional wisdom held that 2019 would mark the all-time peak in global oil demand. Instead, 2022 demand will likely surpass the previous record with no signs of slowing down anytime soon. The IEA now expects global demand will reach nearly 102 m b/d in Q3 of 2022, three months earlier than even we had predicted. Given the IEA’s propensity to underestimate demand, the final number could come in even higher. Gasoline and diesel demand are setting new records around the world and even aviation fuel is back to pre-pandemic levels despite travel restrictions still in force (notably in Asia).
Why were so few people prepared? Even now we do not think most investors understand the gravity of the situation. Things are about to go from bad to worse yet the energy weighting of the S&P 500 is lower today than it was when COVID was first spreading in the beginning of 2020. Energy stocks make up 3.4% of the S&P 500 compared with 11% in 2014 (the last time oil prices were this high) and the record-high 33% set in 1980.
Whether you look at absolute prices, the backwardation, producer stock prices or inventory levels, all the normal market signals are screaming for more oil. This in turn requires more upstream capital spending. Unfortunately, ESG pressures are serving as a block, preventing capital from entering the oil market and preventing it from balancing. There is little relief in sight. Capital spending at the 100 largest energy companies in the S&P 500 topped out at $228 bn in 2014 and had already fallen by a third to $155 bn in 2019. The COVID-19 pandemic drove capital spending budgets lower by another 40% in a single year to $91 bn in 2020. With oil prices nearing $100 per barrel, energy capital spending is only expected to reach $98 bn in 2022 and $110 bn in 2023 – half the levels in 2014 the last time oil was above $90 per barrel. Companies talk about how they are listening to their investors and not investing capital in their upstream business. Clearly the market is not acting as though there is an acute oil shortage.
Today’s situation is the result of years of vehement rhetoric against the energy industry. Pundits have declared how oil stocks are the new tobacco stocks without the slightest understanding of complex global energy markets. Unfortunately, no one bothered to provide an equivalent Surgeon General’s report this time around.
Making matters worse, the agencies charged with providing reliable timely oil market data have done anything but. As we have discussed in our letters for years, the IEA chronically underestimates global oil demand, mostly from the non-OECD world. Their estimates of supply and demand rarely reconcile with observed inventory behavior, often by 1 m b/d or more. We refer to this discrepancy as the “missing barrels,” and we have explained that we instead believe they represent under-estimated emerging market demand. The IEA’s February 2022 Oil Market Report proves our analysis was correct.
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.
In their report, the IEA revised non-OECD demand higher by nearly 1 m b/d every year going back to 2018. Beginning in 2010, the IEA has now underestimated global oil demand in 10 of 12 years (leaving aside 2020) by nearly 1 mm b/d each year on average. This is a systematic problem with their methodology and yet few people openly acknowledge the ongoing errors. As recently as 18 months ago, conventional wisdom held that 2019 would mark the all-time peak in global oil demand. Instead, 2022 demand will likely surpass the previous record with no signs of slowing down anytime soon. The IEA now expects global demand will reach nearly 102 m b/d in Q3 of 2022, three months earlier than even we had predicted. Given the IEA’s propensity to underestimate demand, the final number could come in even higher. Gasoline and diesel demand are setting new records around the world and even aviation fuel is back to pre-pandemic levels despite travel restrictions still in force (notably in Asia).
Why were so few people prepared? Even now we do not think most investors understand the gravity of the situation. Things are about to go from bad to worse yet the energy weighting of the S&P 500 is lower today than it was when COVID was first spreading in the beginning of 2020. Energy stocks make up 3.4% of the S&P 500 compared with 11% in 2014 (the last time oil prices were this high) and the record-high 33% set in 1980.
Whether you look at absolute prices, the backwardation, producer stock prices or inventory levels, all the normal market signals are screaming for more oil. This in turn requires more upstream capital spending. Unfortunately, ESG pressures are serving as a block, preventing capital from entering the oil market and preventing it from balancing. There is little relief in sight. Capital spending at the 100 largest energy companies in the S&P 500 topped out at $228 bn in 2014 and had already fallen by a third to $155 bn in 2019. The COVID-19 pandemic drove capital spending budgets lower by another 40% in a single year to $91 bn in 2020. With oil prices nearing $100 per barrel, energy capital spending is only expected to reach $98 bn in 2022 and $110 bn in 2023 – half the levels in 2014 the last time oil was above $90 per barrel. Companies talk about how they are listening to their investors and not investing capital in their upstream business. Clearly the market is not acting as though there is an acute oil shortage.
Today’s situation is the result of years of vehement rhetoric against the energy industry. Pundits have declared how oil stocks are the new tobacco stocks without the slightest understanding of complex global energy markets. Unfortunately, no one bothered to provide an equivalent Surgeon General’s report this time around.
Making matters worse, the agencies charged with providing reliable timely oil market data have done anything but. As we have discussed in our letters for years, the IEA chronically underestimates global oil demand, mostly from the non-OECD world. Their estimates of supply and demand rarely reconcile with observed inventory behavior, often by 1 m b/d or more. We refer to this discrepancy as the “missing barrels,” and we have explained that we instead believe they represent under-estimated emerging market demand. The IEA’s February 2022 Oil Market Report proves our analysis was correct.
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.
Everyone has a price. Ah, the optics at Shell
1) Fri 5pm @ trading close. Buy 725,000 bbl of Russian crude @ $28.50 discount. It’ll fly under the radar, right?
2) Fri night. Oh bugger. People upset.
3) Sat Am. Donate $20m profit to Ukraine fund.
DSH - thanks for the question.
It's saying commodities are currently dirt cheap. In fact, they are the cheapest they have ever been to the share prices that make up the S&P 500. Whilst this chart is not a market timing tool it shows that commodities (and commodities company shares) are really undervalued, it also shows what happened during the 1970s and 80s inflationary period and after the dotcom bust i.e. after low points on the chart there were strong bull markets in commodities.
I know how much everyone loves their charts! Been following this monthly for a while waiting for it to pop, bullish divergence of MACD Histogram usually a strong signal on longer term charts.
https://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=Stock&symb=UK%3ABMN&time=13&startdate=1%2F4%2F1999&enddate=3%2F3%2F2022&freq=3&compidx=aaaaa%3A0&comptemptext=&comp=none&ma=2&maval=26&uf=0&lf=4&lf2=2&lf3=1&type=4&style=320&size=4&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=11&x=41&y=22
Chart - a long way for commodities to go
https://mobile.twitter.com/crescatkevin/status/1495959631134433280
Chart - a long way for commodities to go
https://mobile.twitter.com/crescatkevin/status/1495959631134433280
Chart - a long way for commodities to go
https://mobile.twitter.com/crescatkevin/status/1495959631134433280
Chart - a long way for commodities to go
https://mobile.twitter.com/crescatkevin/status/1495959631134433280
Chart - a long way for commodities to go
https://mobile.twitter.com/crescatkevin/status/1495959631134433280
Chart - a long way for commodities to go
https://mobile.twitter.com/crescatkevin/status/1495959631134433280
Chart - a long way for commodities to go
https://mobile.twitter.com/crescatkevin/status/1495959631134433280
Chart
https://mobile.twitter.com/crescatkevin/status/1495959651074154499
Chart
https://mobile.twitter.com/crescatkevin/status/1495959651074154499
Chart
https://mobile.twitter.com/crescatkevin/status/1495959651074154499
Graph of the above. In 2008 the Energy Sector made up 16% of the S&P500 whilst at the start of this month it only made up 3.7% - below the level it was at during the dotcom bubble. This is a very important graph to monitor for Energy Sector investors and shows there is a long way up over many years still to go.
https://mobile.twitter.com/TaviCosta/status/1498547963827683328/photo/1