If you were to go back and construct a bearish case for oil two months ago it would have looked something like:
- A two-month lockdown in China's biggest city, among others
- Widespread evidence of a global growth slowdown
- A 1 million barrel per day release from the US strategic petroleum reserve
- Refinery issues leading to fuel prices far above the cost of oil, creating demand destruction
- OPEC+ unexpectedly adding supply
- Terrible risk appetite in markets, with stock falling into a bear market
- The US quietly letting Iran barrels evade sanctions
All that has happened.
Two months ago on April 7, WTI crude as at $95 and now it's at $120. A gain of 26%.
What does that tell you?
I don't think the message could be any clearer: There isn't enough oil.
Whether that's Russia not able to export enough, higher demand or OPEC lying, it doesn't really matter. There simply isn't enough oil and demand is inelastic.
Here is a chart of US inventories from CIBC:
Add in gasoline, distillate and jet fuel inventories and it gets much worse.
Looking ahead, it's tough to see anything other than demand destruction derailing it.
We have China coming back and the EU phasing in a Russian oil ban. The extra SPR barrels will run out in October.
If you look the production side, producer discipline is holding and even if it didn't, oil contract drillers don't have the operating rigs, crews or steel pipe to ramp up. The most-telling was Halliburton saying that it's sold out for the remainder of the year, something I repeatedly highlighted.
Don't take my word for it:
- Goldman Sachs pump their oil price forecasts higher
- Citi boost their oil price forecasts higher for 2022 and 2023
- Morgan Stanley see potential for Brent oil to rise to to $150 / barrel
Today's price action is another case-in-point. Markets were soft, crude dipped below $118 and there was no catalyst. Then the smallest bid crept into crude and it jumped to $120. There are no sellers in oil right now.
Granted, when you have all these analysts boosting crude targets and even Cramer saying to buy oil stocks, you need to be a bit skeptical but I'd balance that against the overwhelming majority of fund mangers who hated oil for years and will only touch it if absolutely forced to. Oil company valuations are still absurdly low.
I don't think this can turn until oil company shares get high enough that drilling rather than buying back stock or paying down debt makes sense. With companies trading with 15-50% free cash flow yields, I think that's a long way away. Alternatively, oil prices need to get so high that demand is curbed. Where is that? I think it's certainly above the 2008 record high of $147.27 and I probably not until $180.
