Key point: Crude oil likely sees further upside on the back of major underinvestment.
Crude Oil Supply Tailwinds: Crude oil has been quietly achieving, and I would say overall the path of least resistance is still higher for crude in the coming months and quarters. One key reason is the substantial supply tailwinds already baked-in.
First it was the commodity crunch of 2014-16 that sunk commodity related capex, and then a second wave of commodity crashes in 2020 (need I remind you of the brief foray into negative prices for WTI crude?!) where the pandemic also caused tremendous and varied disruption to commodity investment.
Add to that steady shifts in investor preferences and social/political attitudes—i.e. the rise of ESG investing and the quest for carbon zero. Basically this has starved the oil & gas sector of funding, and essentially engineered a new bull market in energy.
All that’s left now is for reopening and post-pandemic normalization to drive a more fulsome recovery on the demand side and crude could easily top $100/bbl.
Clearly this is interesting in its own right and with regard to energy sector equities, but is also meaningful for the inflation picture (and potentially also the growth outlook).