We have had a few questions this past week about the price of oil and whether or not we remain bullish. The quick answer is yes, and the reasons are below:

 

• Global consumption is back to pre-pandemic levels (100MM BOE/Day)
• China reopening will increase demand
• Oil companies have been very disciplined and are not increasing production
• At some point, the US has to repurchase 200MM barrels of oil to fill up the strategic petroleum reserve. We do not believe this will make the price of oil go up however, it is likely to put a floor on oil prices in the event of a hard economic landing.

 

As you can see from the chart above, oil consumption is back above 100MM barrels a day which was the pre-pandemic level. If we assume that China remains open it would be fair to say that at least 1MM barrels per day of oil demand will increase from China while our another 1MM barrels per day of jet fuel demand is expected just based on the expanded flight schedule over the next six months. If you believe in statistics, then it is very likely that trend line will continue upward for the foreseeable future. Unless of course it's "different this time"!

 

What if we have a hard landing and go into a recession?

If the Federal Reserve is not successful in piloting a soft landing, then oil demand will likely drop a little. It is interesting to note that historically speaking, when we go into a recession oil demand tends to go sideways not down. If this was to happen, we believe the US government would use it as an opportunity to refill the strategic reserves. This would likely put a floor on the price of oil for the first six months of the recession.

 

 

One last point I would like to make is that producers have been reluctant to increase spending on new capital projects. As you can see from the chart above, 2022 spending is still half of what it was at the peak in 2015. Most companies have been buying back shares or paying dividends with excess cash flows. The fact is production is not increasing and demand appears to be growing. At some point the "law of supply and demand" will take over. If demand out strips supply prices go higher.

 

I have also included a piece from our CIBC Economics Team entitled "A reprieve or a stay of execution? (The Week Ahead)”.

 

As always, if you have any questions, please give feel free to give us a call at any time.

 

Have a great weekend.

 

Milan