Crude

With crude oil pummelled to 52-week lows, catcalls ring the ears. Smashed. Bullish sentiment as thin as a carpet in a 1970s bungalow. There’s a recession incoming. The paper market says it, the physical confirms it. Barrels abound. Albeit a physical market that’s hard to read, with tankers furtively bobbing in exotic seas and rumours of this and that doing the rounds. That the Strategic Petroleum reserve in the United States has been drained and stands at the lowest level since 1983 is something for those long the crude complex to hold on to, as they rock quietly in the corner. It appears the recession narrative, resilient Russian production and weak price action have made investors cock-eyed, complacent even, disinterested in long-term fundamentals which speak of a market that is right on the wire. Tight. Super tight. The only source of non-OPEC supply growth – the US shales – is moving from a production plateau to outright decline. Some corners of the investment community even whisper that the mighty Permian basin is on the cusp of decline, a notion mooted by a Wall Street Journal article exposing the fall in well productivity as the Tier 1 inventory got aggressively rinsed over recent years. The decline in productivity is not a surprise, it has been expected, it’s what happens in oil fields; the shock is that is has happened so soon and Permian producers are now being forced to drill lower quality rock for the first time. Productivity is only set to get worse. The shale boom – argue beleaguered bulls – is well and truly over, but the boom has masked the declining trends in conventional production at a time when inventories are being run down. AI might grip the imagination of retail investors who – as per Vanda Research – have been pumping in $1.5bn per day into US stocks, but it’s energy that matters. This week the National Grid in the UK asked the operator to plug back in a coal plant to meet the expected surge in demand on account of the ‘hotter than Spain and Miami!’ weather the UK has been lolling in. Coal. For electricity. In 2023. The coming shortage in energy markets this decade, will be one for the ages.