Today we have some interesting commentary from Adam Rosencwajg of resource investors Goehring & Rosencwajg. Oil companies haven’t been investing much into new drilling, which is leading to declining production. At the same time, demand is ramping higher as Covid-related lockdowns lift, returning toward 2019 demand levels. The difference between rising demand and falling supply is being made up from inventories. Rosencwajg is predicting that inventory drawdowns will hit 3.5 million barrels a day — a stupendous figure. Here is the U.S. government’s Energy Information Agency’s expectations of petroleum liquids supply and demand:
Production is expected to rise about 7m b/d between 1Q and 4Q, to meet rising demand.
Looking forward through the rest of this year, we believe oil market deficits will accelerate, causing inventories to plummet.The IEA currently estimates demand will average 97.6 mm b/d for the remainder of the year. To the extent global vaccine distribution accelerates, we believe this figure could be too low by as much as 1.5 mm b/d. Non-OPEC+ production is expected to grow by 1.8 mm b/d, driven by nearly 1 mm b/d of growth from the US shales. We simply do not believe this is likely given our modeling of core exhaustion and productivity trends. Instead of growing by nearly 1 mm b/d from here, we believe total US production will continue to fall by as much as 400,000 b/d. Based on their figures, the IEA expects the call on OPEC+ to average 44.6 mm b/d for the rest of the year compared with actual production of 41.3 m b/d in April. Assuming OPEC+ returns production according to their recently announced schedule, the IEA expects the market to remain in deficit by 1 m b/d for the remainder the year. Making the adjustments we described (increasing demand and decreasing US shale output), we believe the deficit will exceed 3.5 m b/d, causing inventories to approach record low levels. If our models continue to be correct, global oil markets should remain in deficit even if OPEC+ returns to producing at its all-time high levels.
Read the rest of the item here.
Things might get pretty wild.