Oil’s Price Bound To Rise: Just Wait For The Demand Recovery
Dylan Banchetti | Oct 02, 2022 08:27AM ET
- Oil’s late decline is sentiment-driven, not related to economic fundamentals
- Supply is already at maximum capacity, with no short-term or long-term growth prospects
- Any pick-up in demand will break through the supply ceiling putting massive upward pressure on oil prices
- Inflation
- Geopolitical turmoil
- Disruptive technologies
- Interest rate hikes
During the third quarter oil prices have followed the market’s steady decline, falling by 25% since early July. And yet, oil supply seems to only be getting tighter and tighter with little-to-no chance of loosening any time soon. Supply is stalling while demand is set to pick up, hinting that the upshot in prices we saw as Covid restrictions loosened might happen all over again.
Bearish Sentiment, Bullish Fundamentals
Much like most other financial instruments in 2022, oil’s downward path has more to do with market sentiment than with supply and demand dynamics. The Federal Reserve’s aggressive policy, a benchmark for other central banks, has investors bracing for a warned , years of underinvestment in new oil production are beginning to make an impact. And, in this macro climate, energy capital expenditure is showing no sign of picking up. In fact, it is plummeting.
The slowdown in demand explains part of the market’s underestimation of global oil supply tightness. Yet, demand is bound to recover at some point and there are two situations that suggest that may happen sooner rather than later. 1) China (and its 1.4b people) remains largely under lockdown and is bound to reopen by the end of the year; 2) spiraling gas prices will lead to increased demand for fuels (including oil) in the generation of electricity.
The current equilibrium in oil markets is temporary and fragile, held in place by a step back in demand. Any step forward would break through the supply ceiling, putting massive upward pressure on price. It is not a matter of whether demand will recover, but when.
In my next piece, I’ll be sharing an energy company well-positioned to ride the demand recovery when it happens.
Disclosure: The author does not currently hold a position in any oil-related securities. This article is written for informational purposes only. It does not constitute a solicitation, offer, advice, counseling, or an investment recommendation.
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