Oil prices to grind higher?
Abraham George Macro Musings
In my last report on oil, I argued that the lower handle of the $70 area is a good level to be long oil strategically. Since then oil has not traded below 70. I think there are more reasons to be long oil now than at any other time. We could be soon trading in three digits again and I will state my case.
In the recent State of the Union speech, President Biden made the case that oil companies have no incentive to invest in new production facilities but only an incentive to produce and return profits to shareholders at higher and higher oil prices as prices are driven by lower and lower supply.
Below were his comments:
“You may have noticed that Big Oil just reported record profits. Last year they made $200 bio in the midst of a global energy crisis. It’s outrageous. They invested too little of that profit to increase domestic production and keep gas prices down.”
If oil companies are not investing in more production is it really their fault? Oil businesses have a long gestation period. If the world is so focused on ESG and the oil companies are going to be penalized for every effort they make to increase capacity, they are just going to give up. All the renewable energy plans will not replace the fossil fuel shortage that they are creating now and this gap could extend for many years.
Add to this president Biden has drained 40% of the country’s strategic petroleum reserves, in a clear effort to manipulate prices lower. No doubt it has worked but this is going to be temporary. Finally, they will be forced to replenish those reserves as prices move higher, which will only worsen the case for any weaker oil prices.
What has also happened in the last two years is that the Western nation’s war on new oil production has enabled OPEC and Russia to dictate supply and therefore prices.
The west has been requesting and hoping for OPEC countries to produce more oil but the oil producers are now following their own agenda. They have not only rejected their requests but have cut production since the latter part of last year. Russia just announced a production cut of 5%.
On the demand side with China opening up and the US having to replenish its strategic reserves it is very difficult to see oil much lower than current levels. To top it up IMF has upgraded its global growth forecast.
What will all this do to inflation? There is no doubt inflation will remain persistent but if it is accompanied by higher growth, we can live with it. The worst situation is higher inflation and lower growth.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.