Jeffrey Currie, head of energy research at Goldman Sachs, made a very bullish case to investors in a presentation on Wednesday. He sees oil at $95 per barrel by December 2010. Even more interesting though were his views on the market’s current inflation expectations, which went a little like this:
A recovery in EM demand growth will push the market back towards effective production capacity by 2011
The equity markets have primarily been pricing in EM growth over the past three months
It is EM growth expectations that have created the rise in inflation expectations and commodity prices
So it’s all about EM growth rather than real fears of inflation back in mature markets. Accordingly, Curries sees the recovery playing out a little bit like this:
2009H1: Bridging the gap to economic recovery
WTI timespreads strengthened as an inventory dislocation was avoided and as the credit dislocation unwound, which allowed a normalization of the WTI timespread inventory relationship.
2009H2: A cyclical bull market as the economy stabilizes
WTI timespreads to continue to strengthen in a cyclical crude oil rally, but OPEC holds the key in the near-term.
2010H1: Long-term shortages generate near-term surpluses
Rising WTI crude oil prices amidst weakening timespreads as long-dated prices rise to motivate investment in non-OPEC production capacity.
2010H2: From financial crisis back to energy crisis
WTI timespreads strengthen once again as dwindling supply leads to a new cyclical rally.
And he agrees with BP’s Tony Hayward that the energy crisis coming our way is actually more political than geological. Currently, though, there stands as an obvious imbalance within the market just like there was with the financial market:
As for the current glut in distillates, Currie says this was forged by a contraction in manufacturing activity stemming from the global crisis, which ultimately was responsible for the collapse in oil prices in the fourth quarter of 2008. But as the “credit normalisation” rally pre-empts an economic recovery, prices will once again rebalance.
(click to enlarge)
The disconnect witnessed in May between oil market fundamentals and prices, meanwhile, was down to the oil market beginning to price in normalisation of the credit market fundamentals. But once the recovery is in place, these fundamentals will reconnect.
On that basis though, a drawdown in distillate oversupply, we presume, should be a key indicator for economic recovery. US weekly distillates builds have recently been forming at a smaller rate, but with reports that a lot of the volumes are heading into floating storage, it would as yet be unwise to claim the problem has been resolved.
Goldman Sachs and the unrecognised energy crisis – FT Energy Source
Distillate overhang – FT Alphaville
So who says there’s no oil/dollar correlation? – FT Alphaville
On the issue of oil demand, not supply problems – FT Alphaville