Green initiatives and anti-carbon sentiment will exacerbate bullish oil market fundamentals
Energy equities basically trade as a proxy for the commodity. It is a well-documented relationship, evidenced in the large US and Canadian financial markets, and in Europe and Asia as well. Intuitively, the relationship makes sense since changes in oil prices directly impact profitability and cash flow.
Given the longstanding relationship between energy share valuations and crude prices, it is notable the past year saw gaps develop between the two — gaps that reflect pressures on money managers towards green energy initiatives and related anti-carbon technologies. We have written about green energy programs causing a misallocation of resources away from critical carbon-based energy sources, but the equity price behavior underscores underinvestment in oil supply.
Capital budgets for oil and natural gas production were cut by $2.2 trillion since 2014. We see that as a contributing factor behind last year’s non-OPEC production behavior. You may recall that the consensus projected non-OPEC output would see a gain of 1.7 million barrels per day last year; the actual total came in at about a third of that figure (the production rate was actually a shade lower than what we had forecast). The same situation is afoot for 2022 with the consensus projecting the largest ever gain for non-OPEC — and like last year, we forecast there will be a much smaller gain.
Though the first two weeks of this year have seen one of the largest energy equity share prices gains ever (actually the sixth biggest two-week gain since the S&P began publishing industry grouping prices back in 1989), share prices are still too low based on current oil prices. The gap to “fair value” is between 16 percent and 33 percent for the major energy indices in the US, Canada, Europe and Asia.
As for oil market fundamentals, the data has continued to pattern in a bullish manner contrary to what most expected.
Global oil inventories were drawn down in December two-and-a-half times more than normal, and our preliminary estimate for global demand last month put the figure above November’s rate (which was a 20 month high). The finding seems important given ongoing concerns about pandemic effects.
Worries about the omicron variant have been a major market consideration of late, which is why it seems pressing to highlight our demand estimate for December and our other separate assessments of close-to-real-time data. In all, the analyses suggest the global economic recovery is still underway. One very recent analysis we generated for clients centered on China’s demand for December, which showed an extremely large year-over-year gain – contrary to what many believed given the headlines about the pandemic.
• 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 the global energy markets and has been attending OPEC meetings since 1986.