MacroView – The Energy Rally Is Likely Premature

OPEC + has decided to add another 500 thousand bpd to the current production cut of 7.7 million bpd in Jan. It has agreed that OPEC + will hold another meeting, but not to increase more than 500 thousand bpd.” – Reza Zandi

The Demand Disruption

Then there is the demand side of the equation.

energy rally, #MacroView – The Energy Rally Is Likely Premature

Of course, the problem with dropping demand is that it exacerbates the “supply glut,” leading to continued oil price suppression. Now, it is also leading to a “storage problem” with supplies overwhelming the storage available.

As noted by Bloomberg recently:

“Oil tanks in America’s most important crude storage hub are filling to the brim once again, quickly approaching the critical levels reached in May after prices crashed. 

Stockpiles at Cushing, Oklahoma, the delivery point for West Texas Intermediate futures, stood at 61.6 million barrels as of Nov. 13, or about 81% of capacity, according to the most recent U.S. government data. That’s 3.83 million barrels shy of the levels seen in May.”

energy rally, #MacroView – The Energy Rally Is Likely Premature

There are several reasons why demand likely won’t recover back to levels that would absorb the current over-supply issue.

  • Weak economic global growth will continue due to continued increases in debt.
  • The slow and steady growth of renewable/alternative sources of energy
  • Improving efficiencies in energy consumption (EV’s, hybrids, solar, wind, etc.)
  • Technological improvements in energy production, storage and transfer, and;
  • A rapidly aging global demographic

All this boils down to a longer-term, secular, and structurally bearish story.

Conclusion

While many hope for a “V-shaped” recovery, this will likely not be the case after reopening the economy. The “virus” was only the anticipated catalyst that triggered the economic recession.

For all of these reasons, the recent “exuberance” in chasing energy companies is likely misplaced. In reality, there is likely a lot less “value” in the sector than many currently believe.

However, unless there is a reduction in supply and thorough cleansing of the energy sector, the longer-term issues will continue to weigh on energy companies into the future. Ultimately, producers will opt into making cuts, or market dynamics will make the cuts for them. Making a choice is always much less painful than having no choice at all.

You probably don’t want to be overexposed to the sector when that happens.

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