Macro view on oil… it’s still the demand

Yardeni’s year end report on the oil macro picture is out, and on it’s face it should be encouraging for bulls short term. Long term, it’s clear that absent extraordinarily low prices, demand growth would have fallen in 2015. Producers have no pricing power and prices over $50/bbl would likely redepress demand.

OECD demand growth did go positive during the year, but only fractionally. Demand in the OECD was actually up, but marginally from 32.5 million bbl/day to 32.9 million bbl/day. This breaks the trend as German demand flattened out, UK, Italy and the US all rose while Japan continued it’s decline.

The big news was demand growth in China and India which both appear to be strong. However, it’s unclear how much of this demand is the result of economic activity and how of this is the result of expanding petroleum reserves in a time of low prices.

Expect a cap on pricing between 46 and 49. Anything over should be looked at as an opportunity to sell as I don’t see anything other than demand loss.

As for this piece from the WSJ, don’t waste your time… it’s full of shit like this:

Some money managers disagree. Bullish investors believe that non-OPEC supply could fall sharply in 2016, spurring a rebound in prices by year-end. Large producers faced pressure to cut spending even before oil prices plunged, and the pace of spending cuts accelerated in 2015. Producers delayed or canceled about 13 million barrels a day worth of oil output in the past five years, equal to about 14% of current global production, including 5 million barrels a day that would have been produced by 2020 deferred due to low prices, according to energy-focused investment bank Tudor, Pickering, Holt & Co.

“Demand is growing and supply is reducing,” said Tim Guinness, chief investment officer of Guinness Atkinson Asset Management Inc., which manages $300 million in energy-equity investments. Mr. Guinness said he expects to see Brent oil prices at $75 a barrel by the end of 2016. “The world was out of balance. It’s now coming back into balance.”

Yes, it’ll fall but not sharply… At 50, producers are mostly profitable and they can now drill a lot cheaper. There will be supply growth at $50 and demand will start to drop. $75 for Brent is laughable. The sweet spot is around 43-45 which is where I think oil will average out over 2015 absent Iran going to war with Saudi Arabia or Samsung announcing they have a really good supercapacitor that would be perfect for transportation.

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