Bullishness across commodity markets is overwhelming. Goldman's Jeffrey Currie summed it up earlier this week by saying "This is a molecule crisis. We're out of everything, I don't care if it's oil, gas, coal, copper, aluminum, you name it we're out of it."
Yet there is the occasional bear - and in oil, one bear is arguing that oil will fall in just a few months.
Citi's head of commodity analysis Ed Morse is a rare contrarian voice in a sea of commodity analysts predicting oil at $100. For a while now, Morse has argued that instead of rising much further, oil will actually fall this year, potentially averaging $65 per barrel by the end of the year.
"I think there's been a colossal failure of the analytical community to look at what's happening on the ground, to look at projects that have been reaching final investment decisions, to look at where the efficiency of capital is, to be blindsided by a prejudice, which says not enough capital is being spent, and decline rates are going up," Morse told Barron's in a recent interview.
According to Morse's team's projections for this year, global oil supply should increase by 5.5 million bpd, and this is excluding Iran, which seems to be nearing a chance to return to global oil markets if the ongoing talks about its nuclear program with the United States end with an agreement. As Bloomberg's Xavier Blas noted in a recent column, Iran may already be exporting oil illicitly, and the lifting of U.S. sanctions may not change the amounts much, but the very news will be bearish for oil prices.
Citi's Morse is placing a specific focus on non-OPEC supply and specifically U.S. supply. Despite drillers' continued financial discipline, Morse expects that U.S. crude oil production this year will rise by at least 800,000 bpd and further by more than a million barrels daily in 2023. That would bring it to a record of 13.9 million bpd, Barron's notes in the interview with the Citi commodity expert.
On this, Morse agrees with the Energy Information Administration. The agency wrote in its latest Short-Term Energy Outlook that it expected U.S. oil production to reach an average of 12 million bpd this year and 12.6 million bpd in 2023, a record high on an annual-average basis, the EIA noted. At the same time, however, the EIA revised up its oil price predictions for this year, suggesting demand will match increased supply if not continue exceeding it.
For now, most analysts seem to think that there is a big threat of global undersupply of crude oil. Spare production capacity is the biggest problem fundamentally: it is frequently cited as a major reason for bullish oil price predictions.
The global head of market analysis at Vitol, for example, recently said the commodity trader expected OPEC's spare capacity to thin further this year until the only untapped spare capacity in the cartel remains in Saudi Arabia while global demand continues rising.
"Demand is 100 million barrels a day with a spare capacity of 2.5 million," Gunvor chief executive Torbjorn Tornqvist told Bloomberg recently. "That doesn't sound like an oversupplied market, does it?"
To Citi's Morse, however, the undersupply is a temporary affair brought about by seasonal factors. "We see the near-term tightness as a winter phenomenon, and see global oil balances moving back to surplus in the second quarter," he said as quoted by Bloomberg earlier this month.
To say that Morse is a rare voice among analysts would be correct. But he is not exactly alone. ConocoPhillips' Ryan Lance said he was worried about the rate of production growth in the Permian. Per a Bloomberg report, Lance told investors that "I'm absolutely concerned about it. If you're not worried about it, you should be."
Lance expects the Permian to add some 900,000 bpd this year, which, according to him, is cause for worry. Yet, according to other industry executives, such an increase would be unsustainable: the shale patch is running out of sweet spots.
"You just can't keep growing 15% to 20% a year," Pioneer Natural Resources Scott Sheffield told the Wall Street Journal. "You'll drill up your inventories. Even the good companies."
Predicting oil prices for any future moment is a tough undertaking because of the multiple factors constantly at play. Bloomberg's Blas reviewed these recently in the context of Morse's contrarian stance and noted that some of the Citi expert's arguments that lower prices were coming instead of higher prices sound kind of far-fetched at this point.
But, Blas also wrote, "when everyone is bullish, I get twitchy. I imagine someone, somewhere, quietly selling - and that contrarian strategy proving to be prescient in some dramatic way. Call it the oil version of 'The Big Short,' the book and the movie about the 2008 financial crisis."
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
If he is basing his projection of the oil price averaging $65 a barrel by the end of the year on an illusory rise in non-OPEC+ supply by 5.5 mbd specifically US supply, then his arguments don’t have a leg to stand on.
An estimated global spare oil production capacity of 2.0-2.5 mbd is hardly enough to reduce tightness in the market.
Moreover, the maximum US shale oil production could rise in 2022 is 200,000-300,000 barrels a day (b/d) to 11.2-11.3 mbd compared with an average production of 11.0 mbd in 2021. The fact that shale drillers are sticking to production discipline has less to do with capital discipline and far more to do with inability to raise their production beyond 200,000-300,000 b/d above 2022.
Therefore a rise of US production from a projected 11.20-11.30 mbd in 2022 to 13.9 mbd in 2023 is a jump too high even with an extraordinary amount of hype.
The global oil market is already in a super-cycle phase that could last ten years and could take Brent crude to $120 a barrel in the next few years. In fact, high oil prices are here to stay well into the future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London