The recent rapid sell-off is not based in the realities of the long-term oil market. Investors are only looking at the volatility of demand, without considering the structural supply issues that will continue to plague the global oil market for at least the next five to six years. We can measure global oil inventories, the nexus of supply and demand, and see that global oil inventories will continue to fall due to a chronically undersupplied market – and this is despite China’s continued lockdown suppressing global oil demand by half a million barrels per day.
An impending recession will not result in negative oil demand, but rather a moderation on the rate of growth in the near-term. Meaning the lack of supply may improve slightly, but will still not meet overall demand, even if we factor in a recession in both Europe and North America.
With inflation in service costs, little incentive for oil producers to increase production and volatility in the oil price, it’s a safe bet that the market will remain undersupplied. Most OPEC producers are already approaching maximum productive capacity, with the UAE and Saudi Arabia adding production that won’t come online until 2025 and 2027, respectively. The US Strategic Petroleum Reserve (SPR) release is set to end in November and US shale growth is likely disappearing. China is finally showing signs of emerging from lockdown, signalling an uptick in demand. Taking all of these factors into account, our modelling points to a fundamental price of over $100 per barrel, and major analysts including Energy Aspects and Cornerstone Analytics agree.
There is a fundamental disconnect between the physical demand for oil and the financial demand for oil. Significant policy uncertainty that has arisen due to major market shifts, including an EU embargo on Russian oil in December and the prolonged Iranian negotiations, has combined with increased margin requirements, which has led to a lack of willingness to take on risk. This has led to the lowest net speculative interest in oil since early 2020, which in itself is exacerbating volatility.
So are we still bullish? Absolutely. The four major tenets of our multi-year bull market projection remain unchanged: persistent demand growth for at least the next decade, the end of US shale hyper-growth, the exhaustion of OPEC spare capacity and the end of growth from the global supermajors owing to many years of insufficient investment. With the US midterm election approaching and the end of the biggest SPR release in history, it should become much more apparent in the weekly data that the oil market remains undersupplied.
