On July 4, 2008, US oil costs hit an all-time excessive of $145/barrel. Right this moment, the identical barrel of oil is value about $40 and as a substitute of a peak in oil provide, commodity markets at the moment are considering a peak in demand. How we received here’s a story of know-how and environmental advocacy, and one which has materials cross-asset implications, as per Morgan Stanley.
“The technological shift was in shale oil. New processes allowed producers, largely within the US, to dramatically improve output and accomplish that far more cheaply than issues like deep-water drilling. US oil manufacturing, which had declined steadily from 1985 to 2008, has greater than doubled within the years since. However a shift in environmental attitudes has mattered as nicely. New applied sciences have improved vitality effectivity, whereas inexperienced funding is changing into a significant coverage theme.”
“One of many largest oil producers just lately launched long-term projections for oil over the following 20+ years. These projections noticed oil demand failing to ever actually rise above pre-COVID ranges of their base case. And within the situation the place there’s even better environmental coverage motion than we see right this moment, oil demand might fall materially.”
“We predict costs will actually wrestle to maneuver above $50/barrel, as ranges above it will encourage producers to hedge far more aggressively at these costs. As such, oil costs ought to lag different ‘reflationary’ property on this cycle that we like much more.”
“Inside the vitality sector, it is a cause that we favor producers of pure gasoline over oil, with the previous having far more favorable provide and demand dynamics. Extra broadly, we predict the shifting panorama might drive main divergences between stocks and currencies impacted by oil.”