In
mid-March,
Jeff
Currie,
head
of
commodity
research
at
Goldman
Sachs,
said

the
oil
market

was
moving
into
a
deficit
situation
and
could
push
the
price
of
a
barrel
above
$100
before
the
end
of
2023.

“Are
we
going
to
run
out
of
spare
production
capacity?” the
analyst
asked
Bloomberg
,
“In
2024,
we
start
to
have
serious
problems”.

Time
to
Buy
the
Dip?

“I
think
it’s
a
credible
assessment,”
confirms
Stephen
Ellis,
energy
strategist
at
Morningstar.

“We
have
near-term
surpluses
for
the
first
half
of
2023,
but
we
expect
Chinese
demand
to
come
back
up
and
pinch
demand
a
bit.”

It’s
a
view
shared
by
Rafi
Tahmazian,
director
and
senior
portfolio
manager
of
the
Canoe
Energy
Alpha
fund.
“We
drink
from
the
same
water
as
Jeff
Currie,
he
says.
In
the
short
term,
we
end
up
with
surpluses,
but
the
long-term
perspective
is
quite
different.”

An
unexpected
supply
shock
has
reinforced
and
accellerated
Currie’s
forecast.
On
2
April,
OPEC+
announced
a
production
cut
of
1.16
million
barrels
per
day
starting
in
May.

It
must
be
said
that
since
mid-March,
the
barrel
had
already
begun
a
sustained
rally,
following
the
anxiety
caused
by
the
banking
turmoil,
with
crude
WTI
rising
from
$66.74
on
17
March
to
$83.25
in
mid-April,
while
the
international
Brent
crude
index
rose
from
$72.77
to
$84.75.
However,
both
indices
have
since
fallen
back
to
$75.35
and
$79,
respectively,
likely
held
back
by
fears
of
a
recession.

Investors
Needed

Since
2008,
Tahmazian
says,
“it
is
only
in
North
America
that
we
have
seen
growth
in
supply;
the
rest
of
the
world
has
seen
a
steady
decline,
with
76%
of
supply
in
decline.
There
is
no
solution
to
the
world’s
energy
needs
without
an
increase
in
oil
supply.
The
only
solution
is
increased
capital
spending
in
the
oil
sector.”

After
peaking
at
$779
billion
in
2014,
investment
in
new
production
capacity
fell
to
$583
billion
in
2015,
hitting
a
low
of
US$434
billion
in
2016,

according
to
the
International
Energy
Agency
.
From
2017,
there
has
been
a
slow
climb
back
up,
with
total
investment
reaching
US$446
billion
by
2022
according
to
figures
from
Rystad
Energy
reported
by
Stephen
Ellis.
“Investment
is
expected
to
increase
by
12%
in
2023,”
he
adds.

Until
recently,
three
developments
have
helped
create
an
oversupply
and
pushed
the
price
of
a
barrel
to
its
mid-March
low,
a
low
where
it
is
still
languishing
in
early
May
after
the
April
2022
peak
of
$106,
its
highest
level
since
the
all-time
high
of
$127
reached
during
the
Great
Financial
Crisis.

For
one
thing,
despite
all
the
talk
of
economic
sanctions
against
Russia,
that
country
has
been
pushing
production
to
a
maximum
and
flooding
world
markets,
continuing
to
supply
China
and
India
in
particular.
“The
world
continued
to
consume
this
oil,
even
if
we
wanted
to
punish
the
Russians,”
Tahmazian
notes.

Then,
the
Chinese
economy
slowed
down
and
reduced
its
demand
by
almost
3%.
Finally,
the
US
has
drawn
down
its
strategic
petroleum
reserves
to
unprecedented
levels.
Two
of
these
factors
have
exhausted
their
pressure
on
prices:
Russia
has
reduced
its
production
and
China’s
economy
is
showing
signs
of
a
sustained
recovery.
Following
the
OPEC+
announcement
of
production
cuts,
the
US
indicated
it
would
continue
to
draw
on
its
strategic
reserves
in
order
to
mitigate
rising
prices
at
the
pump.

But
these
factors
are
temporary.
A
major
long-term
trend
will
exacerbate
oil
deficits
and
keep
prices
high,
Tahmazian
says:
unstoppable
demand
growth
from
developing
countries.

“These
countries
have
no
infrastructure,
no
health
care,
no
air
conditioning,
no
middle-class,
and
they
want
it
all,
he
asserts.
And
they
intend
to
use
oil.”

Is
Alternative
Energy
a
Threat
to
Oil?

An
important
question
for
the
financial
markets
is
whether
persistent
oil
deficits
can
be
offset
by
renewable
energy
sources.
The
question
is
especially
relevant
to
road
transport:
will
electric
vehicles
be
able
to
reduce
oil
demand
quickly
enough
before
oil
deficits
become
a
problem?

To
both
questions,
Rafi
Tahmazian
answers
“no”.
“In
the
last
20
years,
despite
all
our
attempts
to
make
hydrocarbons
obsolete,
we
have
gone
from
80%
usage
to…81%.
The
claims
of
the
‘alternatives’
are
false.”

Stephen
Ellis
sees
the
possibility
of
higher
oil
prices
in
part
because
he
considers
that
renewables
are
not
yet
reliable,
especially
because
of
the
lack
of
battery
backup.
He
expects
more
situations
like
the
one
we’ve
seen
in
Texas
“where
prices
are
going
to
come
up
because
we
don’t
have
storage
in
the
system”.
However,
he
ultimately
does
not
share
Currie’s
optimism,
but
rather
envisages
a
rise
of
the
barrel
in
the
$
80-90
range –
certainly
not
the
$100
Currie
envisions.

All
that
said,
one
should
keep
a
pinch
of
scepticism,
as
one
Calgary
energy
specialist,
who
follows
both
the
hydrocarbon
and
renewable
energy
sectors
and
requests
anonymity,
reminds
us.
First
of
all,
he
recalls,
“we’ve
been
hearing
about
deficits
driven
by
lack
of
investment
by
oil
companies
since
2018,
yet
we
still
hit
an
all-time
low
during
the
Covid
and
a
significant
surge
after
the
Ukraine
invasion”.

Also,
the
oil
sector
is
very
politically
controlled,
he
reminds
us.
Indeed,
it
is
by
unilateral
decision
that
OPEC+
has
just
announced
a
production
cut
to
the
surprise
of
everyone,
a
decision
that
it
can
reverse
just
as
quickly.
“People
ask
me
what
the
price
of
oil
will
be
next
year,
he
says.
I
always
tell
them,
do
you
know
what
it
will
be
tomorrow?”

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