Re: Oil-Trying To Cut Through The Noise.

I've been quiet on oil in recent weeks given the lack of edge in forecasting anything given Ukraine/Russia wildcards + China wildcards.

Cap One provided some useful data points today in a client call, which I will summarize below.

Obviously, A LOT has happened since my last update 6 months ago, but I still think signal:noise is very low right now. Rather than give the illusion of false precision, I'll cover broad strokes which I hope to be generally accurate.

Cap One's latest Base Case forecasts:

'22 '23

Oil demand (mmbpd) 100.69 102.1 (+1.4%)

Ending OECD (B, bbls) 2.79 2.86

Base Case numbers take into account China lockdowns but fairly quick recoveries thereafter, don't take into account a recession scenario, but also don't factor in significant lasting Russian supply disruptions.

These numbers are only slightly lower than the last time I did a Cap One update 6 months ago:

Interestingly, even though OECD inventories are forecasted to be tighter YE'22 vs. her previous forecast, YE'23 is about the same.

But what happens in a recessionary setup?

Lakshmi provides some context to the last recessionary bust (not counting COVID): 2007 to 2008, where crude crested $140 before collapsing to $30 before recovering back to the $70s.

Note that similar to now, YE'07 OECD stocks were even tighter than now at 2.55B. Despite that, even though 2007-2008 saw only 500k yoy demand LOSS, it was a -1.5 mmbpd demand loss vs EXPECTATIONS.

Similarly 2008-2009 saw a whopping -3.5 mmbpd YOY loss vs. expectations.

The cautionary note is that headline inflation then was 5.7% vs. 8.5%+ now with a Fed that is far more behind-the-curve and intent on pricking asset bubbles to cool inflation.

IF we go into worldwide recession by '23-'24, the DEMAND LOSS VS. EXPECTATIONS could be as high as 2 mmbpd loss for '23 at 100 mmbpd demand and 4 mmbpd loss for '24 at 99.4 mmbpd.

In a true recession scenario, she expects OPEC+ defend $70 Brent, but not before.

The Gazillion Dollar Question: Could we lose that much Russian supply to offset?

So far, based on various tanker data sources, Cap One is NOT seeing any material disruptions to Russian flows for April, although there is some transient noise on what constitutes floating storage.

Lakshmi is modeling Russian supply losses of ~900kbpd to 9.5 mmbpd for now but cautions that 5/15 is a crucial date to watch with respect to self-sanctions/LT contract renewals.

What about the age-old contention that OPEC Spare is tapped? In the past, I've erred toward's Lakshmi's more conservative assumptions. My base case PRIOR to Ukraine was that OPEC Spare would not get truly tested until YE'23.

What about all the underperformance relative to DoC quotas? Lakshmi: all of the underperformance is in West Africa; KSA/UAE/Kuwait still have ample spare.

Why then are they not uncapping the spigots into $100+ oil? Lakshmi:

OPEC Spare Capacity is NOT a consumer call option; rather it is a PRODUCER call option meant for 2 things alone:

1) Buffering REAL geopolitical supply shocks (like Abqaiq)

2) Political messaging

When the attack on Abqaiq took down 5 mmbpd of Saudi output, KSA had NO force majeures precisely because of safety stocks AND ample spare capacity. OPEC Spare IS NOT MEANT TO BAIL OUT STUPID ENERGY POLICIES BY THE WEST.

Where does all this leave us? Who the fuck knows!

Given no end in sight to the war, and Putin's ratcheting up of pressures on Poland/Bulgaria, I can see a major escalation that leads to REAL sanctions on Russian energy.

Lakshmi sees a middle escalatory path that entails TAXES on Russian oil but perhaps not outright sanctions.

To summarize, despite my LT structural bull thesis in oil, the ST obfuscation from Ukraine/Russia and China still leave me scratching my head. The Pelican doesn't see a sure thing right now in oil and is content to float on the waves.