Re: Oil-Latest Macro Thoughts From Cap One.
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Re: Oil-Latest Macro Thoughts From Cap One.
Lakshmi hosted a private call yesterday and discussed oil macro issues. As usual, I will tease out the salient points, punctuated by my own editorial.
Near-term YE Demand Forecasts:
2022-101.7 (vs. JPM 101.3)
2023-102.9 (would have hit in 2022 without COVID)
Lakshmi points out she is on high end of street and doesn’t see much upside to her numbers.
Lakshmi sees 2 main downside risks though: 1) China RE crisis spillover, 2) China/India energy crisis causing industrial slowdown. I would add: 3) Policy error (export ban) here due to lack of O&G expertise in Biden Admin.
There is an increasing chorus of folks saying OPEC will run out of spare capacity. Lakshmi has been outspoken in tempering this “runaway” oil price scenario. “The call on OPEC for 2023 is 30 mm bbls (vs. 28 mm bbls now) — this should not be a big ask even with a cold winter.”
Lakshmi points out that most of supply growth from 2022-2023 will come from OPEC, and OPEC is unlikely to run out of spare in that window. “However, if non- OPEC projects disappoint in 2H’24, there could be a problem.”
My own back-of-the-envelope for when lack of spare capacity might be a problem was also 2024:
Lakshmi’s forecasts for YE OECD Global Balances:
2021-2.75B
2022-2.92B
2023-2.84B
2.75B is a crucial “safety stock” level.
Importantly for the near-term, Lakshmi sees us hitting 2.68B by April'22 (2.6B if winter is 1 std dev colder than normal). If this happens, prepare for a spike into the 90's. A warmer than normal winter, conversely, would see only $5-$7/bbl of downside.
The asymmetry is from breaching the crucial "safety stock" level. Lakshmi, like @JavierBlas, sees the potential spike as short-lived because of the cumulative DoC additions which will oversupply the market by 2H'22 and won't be worked off until Q1-Q2'23.
Going into Q4, INDIA (not China) will be the primary demand driver as it enters peak festival season while RoW is quiet. Generally, India will be a bigger demand driver going forward. Lakshmi projects 12% growth in '22 and 5% growth in '23.
China accounts for 15% of global demand, but its COVID recovery already happened, and Lakshmi doesn't see China growing like it used to. She sees 3% for '22 and <2% for '23. Note that this assumes there is no metastasis from RE crisis or industrial slowdown from energy shortage.
There's been much pontification about coal-to-oil/gas-to-oil switching in Europe/Asia. Lakshmi did a deep dive on the power plant capacities of the region and estimates that while there is 13 mmbpd of "nameplate" capacity, ACTUAL switchable capacity is likely < 1.5mmbpd.
She thinks there has been minimal switching thus far (100-200kbpd is her guess). The issue is that the intersection of well-maintained plants with switchable capacity located in "non-ESG mandate" countries is small.
On the growing chorus of nations (US/China/Japan/India) calling for more OPEC supply, Lakshmi thinks there is low probability of OPEC deviating from its DoC schedule. I think there are deeper reasons for OPEC intransigence:
She thinks that the feeling within OPEC+ is: "We are not responsible for bad policies in other countries, and no one came to our aid when the COVID demand collapse occurred." Maybe -$38/bbl was a decent time to load up that SPR?
Going through the OPEC countries, she mentioned UAE and Kuwait as two standouts that have high spare relative to their current production. The "problem children" are Angola/Nigeria who seem to have issues ramping back up after slowing down.
She does think (as I do) that a desperate Admin that is flagging in the polls may look to Iran as a way to alleviate high oil prices if the rest of OPEC won't step up since Iran is exempt from the DoC. That said, she thinks 800kbpd is the max near-term "threat" from Iran.
I opined in this sub-thread that the Iran overhang is <1 mmbpd as well.
While Lakshmi didn't comment on the likelihood of an export ban, she agreed that such an action would NOT decrease gasoline prices but that it would definitely wreak havoc on Brent/WTI spread, refiners and could even potentially INCREASE gasoline prices.
Finally, we ended by talking about OPEC's management of the forward curve. Despite the current "Goldilocks" curve, Lakshmi noted that sustained periods of spot prices exceeding $85 would likely result in demand destruction and bring on non-OPEC supply.
She sees almost "no chance" of forward curve flattening or flipping to contango before 2025. The question that leaves with is: IF that happens, will it be from forwards spiking due to lack fo spare or spot softening due to demand destruction?
