Macro Voices
MacroVoices #385 Dr. Anas Alhajji: 2024 Energy Markets Outlook & More
Thu Jul 20 2023Description
The episode covers various topics including the crude oil market, Chinese reopening, impact of storage, ESG trend, investment in the oil industry, changing narrative around energy, OPEC's production capacity, projected global oil demand, limitations of strategic petroleum reserve, issues with data accuracy, global energy demand, renewable energy, technical analysis, market analysis and outlook, US dollar weakness, market conditions, corporate earnings, interest rates, and options strategies.
Insights
Crude oil market
Crude oil is showing signs of a bullish breakout. The Chinese reopening is expected to lead to gradual economic improvement. Lessons have been learned from overlooking Chinese inventory building.
Impact of storage and ESG trend
The difference between demand and consumption is the storage of oil. Chinese are releasing oil from strategic petroleum reserves and commercial inventories. The ESG trend may result in a shortfall of crude oil production by 2030.
Changing narrative around energy
The European governments are subsidizing gasoline and diesel, leading to increased consumption. Investment in oil and gas may increase as some funds abandon ESG policies. Failure of climate change policies may lead to increased demand for fossil fuels.
Projected global oil demand
Global oil demand is projected to reach a record high by the end of 2024. The upcoming presidential election in 2024 will likely bring the issue of oil to the forefront. If OPEC maintains its promised production cuts, there could be a significant supply shortage.
Limitations of strategic petroleum reserve
Refilling the strategic petroleum reserve has limitations due to slow injection time and specific crude requirements. An open congressional investigation is desired to understand the technical status of the caverns. The Gulf of Mexico can supply enough medium sour crude for refilling the reserve.
Issues with data accuracy
Dark shipments and lack of transparency have deteriorated data accuracy in the oil market. There are issues with adjustment numbers and distinguishing between condensate and crude oil.
Global energy demand and renewable energy
Global energy demand has increased significantly, but renewable energy sources still account for a small percentage. China would need a significant investment to achieve carbon neutrality. Crude oil inventories have decreased in Cushing, Oklahoma.
Market analysis and outlook
Oil prices have remained below the 200-day moving average. Equities are expected to retest all-time highs. Technical indicators suggest waiting for confirmation before shorting the market.
US dollar weakness and market conditions
The US dollar is weak, which could benefit commodities like gold, oil, and copper. Market conditions are unique with low volatility levels and complacency among investors.
Interest rates and options strategies
Interest rates are at a crossroad, and certain options strategies can leverage their influence on option pricing. A webinar will be held to discuss options strategies ideal for the current market environment.
Chapters
- Crude oil market and Chinese reopening
- Impact of storage, ESG trend, and investment in oil industry
- Changing narrative around energy and OPEC's production capacity
- Projected global oil demand and potential supply shortage
- Limitations of strategic petroleum reserve and issues with data accuracy
- Dark shipments and issues with oil market data
- Global energy demand, renewable energy, and technical analysis
- Market analysis and outlook
- US dollar weakness, market conditions, and corporate earnings
- Market conditions, interest rates, and options strategies
Crude oil market and Chinese reopening
00:08 - 08:04
- Crude oil showing signs of a bullish breakout
- Discussion on market outlook and Chinese reopening
- Expectation of gradual economic improvement in China after reopening
- Chinese government chartered transportation for people to visit families after lockdown
- Lessons learned from overlooking Chinese inventory building in outlook for Q4 2023
- Chinese strategic petroleum reserves at almost a billion barrels
- Difference between demand and consumption in Chinese oil imports
Impact of storage, ESG trend, and investment in oil industry
07:36 - 15:58
- The difference between demand and consumption is the storage of oil.
- Chinese economy appeared to be growing due to high oil imports, but much of it went into storage.
- Chinese are releasing oil from strategic petroleum reserves (SPR) and commercial inventories, which will prevent a spike in prices.
- China has been aggressively building its SPR for the last three months and may release up to 80 million barrels if prices go up.
- Large oil-producing countries are buying a significant amount of products from Russia, impacting exports and global oil prices.
- Saudi Arabia and other Gulf countries can cut production in the summer as they import cheap Russian fuel oil for power plants.
- ESG trend criminalizing institutional investment in oil and gas exploration may result in a shortfall of crude oil production by 2030.
- Demand destruction due to increased oil prices will mitigate the projected shortage in crude oil production.
- Investment in the oil industry is increasing, with high rates of growth expected in 2022.
- Total Energies and Shell have reversed their plans to cut investment in oil and gas exploration.
Changing narrative around energy and OPEC's production capacity
15:29 - 22:58
- The European governments have changed their attitude towards fossil fuels and are subsidizing gasoline and diesel, leading to an increase in consumption.
- The narrative around energy is changing globally, with India, China, and African leaders shifting their focus.
- Investment in oil and gas may increase as some funds are abandoning ESG policies.
- Failure of climate change policies may lead to increased demand for coal, oil, and natural gas.
- Long-term outlooks often rely on government wishes rather than realistic expectations.
- If we realize the need for viable replacements before phasing out fossil fuels, there will still be demand growth due to lack of progress in green energy development.
- OPEC has almost run out of spare production capacity, which could lead to higher energy prices and potential economic consequences.
- Future production increases are uncertain, with limited potential from shale oil growth and offshore reserves.
Projected global oil demand and potential supply shortage
22:30 - 30:36
- Based on current forecasts, global oil demand is projected to reach a record high of 105 million barrels per day by the end of 2024.
- This record demand is expected to be reached sooner than previously anticipated, potentially even before 2030.
- The upcoming presidential election in 2024 will likely bring the issue of oil to the forefront, with both Trump and Biden taking strong positions on the matter.
- If OPEC maintains its promised production cuts until the end of 2024, there could be a significant supply shortage.
- The cost of energy could prevent economic growth and lead to a prolonged recession similar to the energy crisis in the 1970s.
- However, it is important to note that price controls, which were present in the 1970s, are not a factor today.
- Past evidence suggests that with appropriate physical and monetary policies, the impact of higher energy prices can be mitigated.
- The strategic petroleum reserve (SBR) has been discussed as a potential solution, but refilling it alone may not have a significant impact on oil prices.
Limitations of strategic petroleum reserve and issues with data accuracy
30:07 - 37:53
- The impact of refilling the strategic petroleum reserve (SPR) is limited due to the slow injection time.
- The SPR must be refilled with American-produced medium sour crude, excluding shale and other sources.
- An open congressional investigation is desired to understand the technical status of the caverns and the high cost of maintaining them.
- To make sense, oil prices would need to be low, around $43 or lower for WTI.
- The US SPR will not be fully refilled to its previous levels because it is no longer necessary with increased domestic production.
- Refilling the SPR with light sweet crude would not serve its purpose as a backup in case imports are cut off.
- It is likely that two-thirds of the SPR will be filled with medium sour crude from the Gulf of Mexico.
- In the past, George W. Bush filled the SPR by requiring companies to pay royalties in kind, providing oil instead of money.
- The Gulf of Mexico can supply enough medium sour crude for refilling the SPR.
Dark shipments and issues with oil market data
37:25 - 45:28
- The Strategic Petroleum Reserve (SBR) can be filled with oil from the Gulf of Mexico, which produces a significant amount of sour oil.
- Most of the oil imports are sour, so if there are disruptions overseas, a replacement is needed.
- Historically, companies in the Gulf of Mexico have borrowed oil from the SBR due to hurricane damage.
- Dark shipments refer to ships turning off their AIS transponders to avoid being tracked.
- Iranians and Chinese have perfected this practice, and Russians have adopted it as well.
- Russia and China bought over 1000 tankers to transport oil from northern Russia to China and India, causing shipping costs in that area to decline.
- The data on oil market has deteriorated significantly due to lack of transparency in these dark shipments.
- There are issues with data accuracy related to adjustment numbers and distinguishing between condensate and crude oil.
- Energy Outlook Advisors offers reports on energy outlook and the reality of energy transition through their sub-stack newsletter.
Global energy demand, renewable energy, and technical analysis
45:03 - 53:06
- Global energy demand has increased fourfold since 1965.
- Renewable energy investment has exceeded $4 trillion since 2010.
- Only 7% of total energy consumption is from renewable sources.
- Only 14% of global electricity generation comes from renewable energy.
- China would need $38 trillion to achieve carbon neutrality, while India would need 350 years.
- Crude oil inventories in Cushing, Oklahoma decreased by a massive 2.9 million barrels.
- A sustained breakout above the continuation 200-day moving average of $77.21 for crude oil would be bullish on a technical level.
Market analysis and outlook
52:39 - 59:47
- Oil has remained below its 200-day moving average for an entire year.
- A bullish breakout above the 200-day moving average could lead to a rally in oil prices.
- Equities are likely to retest all-time highs above 4800 on the S&P.
- Technical indicators suggest waiting for a double top or new all-time highs before shorting the market.
- Many smart macro voices have suggested that the bear market bottom is not yet in.
- Short-term resistance levels exist, but there are no reversal signs in the market yet.
- Tech stocks are overextended, and small caps may outperform them in the coming months.
- The US dollar is at a make-or-break point, with a breakdown below 99 signaling further decline.
US dollar weakness, market conditions, and corporate earnings
59:27 - 1:06:38
- The US dollar is weak and breaking down, which could be a bullish tailwind for commodities like gold, oil, and copper.
- Gold has remained close to its all-time high and could make a major breakout if it stays above its moving averages.
- Market conditions are unique with historically low volatility levels and complacency among investors.
- There is a possibility of a short-term pullback in the market after the monthly options expiration.
- The upcoming weeks will be important to determine if stability leads to instability in the market.
- Corporate earnings will play a crucial role in confirming or challenging the current bullish price action.
Market conditions, interest rates, and options strategies
1:06:21 - 1:13:47
- Market conditions are unique with multi-year lows on volatility premium, high interest rates, and trending equity markets.
- Interest rates are at a crossroad, with short-term rates peaking and long-term rates expected to decline.
- The influence of interest rates on option pricing can be leveraged for certain options strategies in the index markets.
- A webinar will be held on July 25th at 1 p.m. to discuss options strategies ideal for today's market environment.
- Listeners can register for the webinar at bigpittertrading.com/money or through the provided link.