The battle lines have been drawn in the oil supercycle debate. On one side stand those who see oil investment cornered by capital discipline and environmental curbs, and on the other those who see US shale and the OPEC+ producer group providing enough supply reinforcements. But oil’s fate could lie in the broader commodity boom.
A swathe of commodities assessed by S&P Global Platts have started 2021 with a bang. Copper, arguably the most critical of industrial metals, has burst beyond $9,000/mt for the first time in a decade. And high-profile investment banks have talked up the prospect of a commodity supercycle – a protracted upward rise in prices due to a structural shift in the way demand outpaces supply.
Goldman Sachs’ head of commodity research, Jeff Currie, said in a recent interview with Platts that there is a risk copper could more than quadruple in value, taking oil prices into triple digits
“Copper is the only thing we know that can conduct electricity at the rate needed, so I'm really curious as to how high some of these markets can go," Currie said, adding that “I want to be long oil and hang on for the ride.”
JP Morgan’s head of oil and gas Christyan Malek told Platts last month that the odds of oil prices spiking above $100/b in the coming years have narrowed due to limitations on US shale’s ability to meet a looming $650 billion capex shortfall.
"While you have seen demand reset, we are going to see a lot of pent-up demand recover in the medium term, particularly the second half of this year, but the reality is it will be like a race to the bottom and supply is being diminished more than demand — it's not zero-sum," Malek warned.
While US shale has been able to respond quickly to deficits and higher oil prices in the past, there are bigger question marks this time given the financial condition of the industry due to bankruptcies and the greater ownership of shale assets by oil majors that have to keep a closer eye on ESG targets and investor returns. US oil output is around 2 million b/d lower than its pre-COVID-19 peak at 11 million b/d.
Some $14 trillion was pumped into the global economy in 2020, according to the IMF, and this, along with China’s demand strength and a weaker dollar, has helped to lift consumption for everything from iron ore and corn to energy.
Certainly, construction activity remains strong, driving demand for petrochemicals and steel. Industrial activity is up across two-thirds of countries and fiscal stimulus in developed countries and increased disposable income are boosting trade.
However, Chris Midgley, head of Platts Analytics, warns that “as with all commodities the risk of a rebound in supply ahead of structural recovery in the economy remains and it may be a bit early to declare a full supercycle.” He added that doubts remain as to whether the fiscal stimuli can maintain momentum.
Standard Chartered Bank’s head of commodities research, Paul Horsnell, was also skeptical. “Couching an oil market view in terms of supercycles is perhaps similar to a pop band on a comeback tour finding it best to just play the old songs, however dated they might now be,” he noted.
For oil there is also the might of OPEC+, with the oil alliance having wrestled the oil market back from the eye-catching and head-scratching depths of negative oil prices in the US in April last year, with an historic 10 million b/d production cut deal. Meanwhile, the global Dated Brent benchmark is now in the mid-$60/b range, having climbed from its April low of around $13/b.
The producer grouping spearheaded by Saudi Arabia and Russia is to meet in early March, with speculation building around how fast they will unwind from current output quotas, including the ending of an additional voluntary 1 million b/d Saudi reduction for February and March.
OPEC+ will have an important say in how the oil supercycle plays out. Oil prices are now at a level that could bring at least the smaller US operators back and even start to tempt renewed longer-cycle upstream investment. However, core OPEC+ countries will also want to increase market share and reap the rewards. A fine line will need to be walked between unwinding from the deal without it unravelling.
Key oil consuming countries such as India have already made their voice heard over higher oil prices, while China will be less inclined to buy strategically at these prices. Meanwhile, there are no guarantees that consumption of key transport fuels globally will return to normal any time soon, especially with jet fuel demand acting as a drag.
While the seeds of a supercycle may be being sown in 2021, whether it will bloom in later years remains very much dependent on choices still to be made by OPEC+, energy companies and policy makers in the months ahead.
London-based Paul Hickin is associate director at S&P Global Platts. Views are his own.