Oil market and the Rubik’s Cube

If you observe the solving of a Rubik’s Cube, it becomes evident a solution is reached only by working the puzzle from different angles. This is how the oil market outlook needs to be approached. Too often we see a forecast hinged on a single factor. It is this reductionism that causes severe gaps to develop between what is predicted and what actually occurs. Assertions that the oil market outlook is “all about shale oil” or “all about China” or “all about peak demand” have proven to have little value and result in significant resource misallocations. This has been an issue for the nearly four decades that we have followed the global energy markets and, sadly, there are no signs it will stop anytime soon.

That noted, an uncertainty still facing the oil market is the pace of the global economic recovery. As vaccination rates expand and isolation/containment measures wind down, there is a wide variety of data indicating that the world is normalizing. Even so, certain knock-on effects from the pandemic are still afoot. Disruptions to manufacturing and processing that took place over the span of several quarters are manifesting in the global system. These dislocations and disruptions are what is now widely reported as “supply chain” issues. We expect that they will eventually pass, but the risks that they pose to economic recovery are one reason OPEC+ treads carefully on its quota unwind.

Were we the only ones to find it ironic that at a time when virtual meetings are used for large-format audiences, these same countries flew an armada of jumbo jets to sit and talk (and in some cases, nap)?

Michael Rothman

When global oil demand began to collapse (literally) in late-winter 2020, the OPEC+ goal was to prevent a cataclysmic ballooning of inventories and to then work down storage toward the 2010-2014 average. The plan has been a success on all fronts in spite of widespread beliefs the effort would fail. Since the July 2020 peak in storage, global petroleum inventories have fallen by 461 million barrels, representing the largest reduction back to 1971 — the year our oil balance data begins. Our heavy focus on inventories relates to the simple fact that there is a strong relationship between storage levels and oil prices, and it makes perfect sense since inventories are where all supply and demand factors intersect.

Much will have already been written about last week’s OPEC+ meeting by the time this column comes to print, and we expect many will focus on a view that the producer group rebuffed the US (and other consuming nations) who pleaded for additional crude to be dumped to lever oil prices down. We are not sure why such drama is occurring, especially since these same consuming countries’ governments are working against their own oil companies to find and produce additional volumes. Moreover, these same consumers just met in Glasgow to preach about the need to “quit oil” and other hydrocarbon fuels. Were we the only ones to find it ironic that at a time when virtual meetings are used for large-format audiences, these same countries flew an armada of jumbo jets to sit and talk (and in some cases, nap)?

 • Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life,” which is available on Amazon.com