Odd Lots This Is What Needs To Happen for Oil Prices to Finally Come Down
Feb 21, 2022
Rory Johnston, Managing Director and Market Economist at Price Street, delves into the complexities of the oil market. He discusses how U.S. companies are hesitant to boost production despite soaring prices. The conversation navigates the impact of geopolitical factors, historical price anomalies, and supply chain challenges, particularly the sand shortage affecting shale operations. Johnston also highlights the evolving relationship between energy firms and investors and explores what it truly takes for oil prices to stabilize in this unpredictable landscape.
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Shale's Bust
- The shale boom led to massive capital destruction due to overproduction and lack of investment discipline.
- Shale's short-cycle nature, intended to stabilize prices, actually exacerbated volatility.
The Trillion Dollar Question
- Current high oil prices should incentivize shale production, but growth has been limited.
- This restraint is due to investor demand for returns after prior losses and other factors like ESG concerns.
Backwardation is Bullish
- Backwardation in oil futures reflects current tight supply, not necessarily future price declines.
- It incentivizes draining inventories, not increased production.