The chances of $100+ oil in '22 are even greater nowDon't let the scary news scare you. Nor the long length of this posting, honestly there is good stuff that follows.
Oil investors are easily spooked, which is not surprising considering the events of the last several years. However, one bad week does not change the fact that we are in a long term term oil super cycle caused by serious structural limitations that will not enable producers to keep up with demand.
Everything dampening oil prices at the moment is very short term and will blow over in the coming weeks.
- Historically the fall is a shoulder season where supply exceeds demand due to the end of summer driving and lower energy requirements for either cooling and heating.
- With regards to Covid, apparently good leadership is about losing your cool and scarying the $#@! out of the populace. It is also about giving misinformation. Covid was never going to be erradicated. The longterm outcome was always going to be for the Covid virus to mutate into a less virulent form. All evidence to date (although it is early) is that the Omicron mutant is far more transmisible but causing less serious symptoms in infected individuals than the previous mutations. If this is the case then this is great news as it will quickly bring an end to the pandemic. The Spanish flu never really disappeared as traces of it can still be found in modern flu viruses. The same outcome will happen to Covid, although it will be come part of the common cold family. A virus' only purpose is to reproduce and spread through the populace and the most successful viruses are very transmissible but do not harm the host as a dead host can not allow for subsequent transmission.
- We also know that lockdowns do not work nor does closing national borders unless you are an island nation like Taiwan or NZ. The best you can hope for is to buy some time, but with such a transmissible virus, even the most stringent border closures and lockdown measures will only buy a little time... weeks, not months.
- Effective therapeutics already exist and very effective anti-viral therapeutics are only weeks away which are proven to vastly reduce COVID deaths. Even if case counts go through the roof, they matter little if very few are getting seriously ill. By Q1 next year COVID will finally stop being front page news and our leaders will be directing their efforts about misinforming us about climate change and white supremecy (thank god they will have something to keep them busy)
- Back to oil, OPEC+ will be very quick and proactive to ensure that what ever demand disruptions caused by Omicron or an economic slowdown will be managed by regulating supply. I anticipate that this Thursday OPEC will announce a 3 month pause in production increases and message that in subsequent meetings reductions maybe considered.
- The SPR release by Biden may be his biggest bonehead move to date. He has simultaneously announced to the world that he is a huge hypocrite, favors foreign producers to domestics, all while damaging whatever leverage he may have had with OPEC to increase production. Further, the SPR release will be ineffective as most domestic refiners prefer sweeter crude, hence he is basically subsidizing refiners in India and China. He may have helped reduce oil from its recent peak of $85 (although the Omicron threat was far more significant), but by motivating OPEC to restrain production, he has enhanced the chances that oil will hit triple digits a lot sooner than otherwise would have happened.
- Europe is now starting to experience colder than normal weather with gas stocks frightenly low sending electricity prices through the roof. Businesses are now investing in private generation which increase demand for oil. Also, generators that can operate on gas or oil will obviously now be using oil.
- There are very few options for increasing supply short term. Shale oil can ramp up somewhat, but are constrained by lower CAPEX (which they can't increase without investor approval). Also, drilling is complicated because of supply chain bottlenecks and labor shortages.
- Looking longer term, beyond significant enviromental obsticles that I do not need to explain, higher inflation discourages upfront CAPEX spending. This is true for any industry as current outgoing cashflows (CAPEX) are worth far more than future income cashflows (revenue) in a high inflation environment. When you have inflation it is better to keep the cash at hand to reduce debt or earn interest than chase future less valuable cash with big capital investments.
- We now know conconclively that renewable energies are unreliable and can only supply a fraction of the total required energy from the electrical grid. If one country could have potentially succeeded in completing the energy transition to renewables, it would be Gernmany - and the disaster of their massive wind and solar experiment is just coming to light.
- Finally, renewables will at best slow down the growth of global fossil fuel consumption as the world population continues to grow and developing nations become wealthier which inevitably means a great thirst for reliable energy (i.e. fossil fuels)
Bottom line, in annual terms (if not decadal), demand for oil will continue to increase as it has done for decades (excluding 2020). At the same time, the supply of oil will be constrained due to environmental regulations and capital investment constraints. In a few years $100 oil will probably start looking pretty cheap.