Calls Grow For ‘Structural Bull Market’ In Surging Crude

I’m continually amused at how quickly the narrative changes.

I used to jokingly refer to the “narrative du jour.” Thanks to the combination of pandemic dynamics, the 24-hour news cycle and, relatedly, market participants’ Linus-like need for an explanation (we need to know “why”), the financial front page infallibly features a new narrative each morning, like those chalkboard signs you used to see in front of restaurants touting daily specials.

Vitol’s Chris Bake underscored how quickly things change. “[It’s] a different picture from the one that was there a month or six weeks ago,” he said Tuesday, of the energy market. “Demand has been good. Oil substitution is happening a lot as natural gas just runs and spirals pricing-wise.”

And so, whereas just “a month or six weeks ago” we were fretting ourselves to death over a “growth scare” and wringing our hands over the prospect of another collapse in demand tied to the Delta variant, now analysts are rushing to raise their targets as oil prices accelerate towards triple-digits.

Bake went on to suggest that OPEC+ might need ramp up production more than planned as consumers make the switch amid the natural gas shortage. The fraught nature of negotiations with Iran is bullish for crude too, he said.

“We’re over $80 a barrel this morning on a Brent basis and we look at the rig counts in the US and other parts of the world, they’re showing you that, hey, $80 a barrel is simply not enough,” Goldman’s Jeff Currie told Bloomberg Television. He also said we’re in “the first innings of a multiyear, potentially decade-long commodity supercycle.”

Again, I’d just note (wryly) that the “commodity supercycle” narrative is dead one day and ascendant the next. In a widely-cited note dated September 26, Currie and colleague Damien Courvalin raised their Brent target to $90. In the process, they captured this week’s narrative pretty succinctly, as follows:

Hurricane Ida has more than offset the ramp-up in OPEC+ production since July with non-OPEC+ non-shale production continuing to disappoint. On the demand side, low hospitalization rates confirm that vaccines are effective and are leading more countries to re-open, including to international travel and particularly COVID-averse countries in Asia. Winter demand risks are now further squarely skewed to the upside as the global gas shortage will increase oil-fired power generation.

In a Tuesday note, BMO’s Ian Lyngen and Ben Jeffery described a similarly favorable trend in the COVID trajectory. “Case counts continue to drift lower and expectations of the return to what awaits in the new normal for the US economy are quickly mounting,” they wrote, adding that “the reversal of the trend in coronavirus cases in the absence of an entirely new vaccination program or a repeat of the restrictions seen during 2020 is particularly encouraging to the outlook for the recovery as it reinforces the notion that forward progress continues out of the pandemic.”

Progress, yes. And maybe even “substantial forward progress.” Still, the US is nowhere near out of the woods. The seven-day average for new cases is still above 100,000 (figure below).

Meanwhile, as the booster debate continues, the pace of vaccinations is the lowest since tracking began in January. And no, it’s not because the US is running out of people to vaccinate. Just 55.4% of the population is vaccinated, despite readily available access (for free) to the best vaccines on the planet.

People in emerging and frontier economies would kill for the Moderna and Pfizer vaccines (figuratively, but maybe literally too). In America, the government can’t even give them away to some recalcitrant citizens.

In any event, the good news is, “the back-to-school season hasn’t triggered a wave larger than that seen at the height of the outbreak,” BMO’s Lyngen went on to write, calling that “yet another reason for the macro optimism that has led to the bear steepening in the Treasury market.”

And also yet another reason for analysts to recalibrate expectations for crude demand, apparently. Goldman this week said crude is moving “from a cyclical to a structural bull market.”

“Where could we be wrong?”, Currie and Courvalin asked themselves. “We see the greatest risk on the timeline of our bullish view,” they said. “On the demand side, it would obviously [be] a potentially new variant that renders vaccines ineffective.”

Yes, “obviously.”