There’s an old saying in Tennessee – it’s probably in Tennessee, I know it’s in Texas – that says fool me once shame on… shame on you… you fool me you can’t get fooled again.
Those are the immortal words of George Bush who, thanks to Donald Trump, is no longer the least eloquent President in American history.
I don’t know how many times we’re going to have to hear the old “demand is catching up with supply” story for crude before we take Bush’s bumbled adage to heart. Every week someone else tells us that the outlook is bullish for crude and every f*cking week we get another build in the US as stockpiles soar to still loftier (and still record-er-er) levels.
On Monday it’s Goldman’s turn to perpetuate the “things are finally turning a corner” meme.
Here’s what the bank said in a note out this morning:
The inventory normalization phase of the oil market rebalancing seems off to an uninspiring start with range bound prices, rising inventories and a sharp rebound in US drilling activity. Our conviction that OECD inventories will steadily decline through 2Q17 remains high, however, with stocks showing declines over the past two weeks and crude forward curves flattening significantly recently.
While the shale production rebound has surprised to the upside, the slightly larger production cuts than we had expected and most importantly, the higher 2016 realized demand level, lead us to expect a slightly faster normalization in OECD inventories through 2017 than previously. The OECD stock draws we project would be further accelerated – as was the case through 4Q16 – if the recent strength in survey activity indicators, pointing to 4% global GDP growth, translates into stronger oil demand growth than our above consensus 1.5 mb/d forecast.
This demand pull is important in our view as the supply response to slightly higher oil prices has been faster and larger than expected. Further, recent OPEC communication supports our view that while the cuts are targeted at normalizing inventories, they will be followed by new production records. While this prospect for greater production levels into 2018 will likely continue to exert downward pressure on long-term oil prices, we expect the strength in demand will continue to absorb excess inventories and rotate the front-end of the forward curve into backwardation.
This is a clear illustration of the dynamics of commodity markets in the expansion phase of the business cycle we are entering, where strong demand creates scarcity even in the context of well identified sources of future supplies, sustaining deficits before a fast-cycle supply can respond. This could in fact lead to long-dated oil prices declining faster towards our long term $50/bbl oil forecast than we expect, with high demand in turn generating a stronger level of backwardation, creating only limited upside risk to our oil price forecast even if inventories decline faster than we expect. Importantly, uncertainty over the future path of global growth, as well as the threat of technological changes to transportation fuel demand, will likely also play into this backwardation, with investors likely to fade the realized demand strength in their forward expectations just as the sources of future supply become more predictable.
So at least that’s a measured take and I would submit that it doesn’t exactly scream “bullish” despite how some journalist somewhere will invariably spin it.
Far be it from me to tell you how to position, but I think the very same Goldman Sachs might have had it right last week when, in a piece about commodities, analysts said simply this:
Show me the activity.