The great oil head fake

That petro-politics and higher oil prices may spark a faster green transition would be a rare silver lining for the energy story in today's chaotic world. Photo by Charlie Riedel/AP Photo/Postmedia files

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In my view, though, they are being underplayed. Huge protests in Iran and threats of a United States military strike raised prices by only a few dollars. The threat of a potential trade war with Europe over Greenland then flattened them again. But markets are terrible at pricing political risk, which is by nature illiquid (each political event is, after all, a kind of one-off) and tough to model. Meanwhile, there are other reasons to think that we may be about to see oil prices start to head higher.

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Let’s start with Chinese stockpiling. As Gavekal Research pointed out in a client webinar last week, despite the move to electric vehicles and the slowdown in the Chinese construction sector, the country is still buying record volumes of crude. China is clearly building up a strategic petroleum reserve, which is a good idea given the fact that America is becoming a petrostate with a goal, clearly laid out in the Trump administration’s national security strategy, of ring-fencing more natural resources.

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On that note, one might argue that U.S. control of Venezuelan oil will bring even more supply into the market, implying lower prices (although it’s worth noting that the market’s initial reaction was a 1.8 per cent rise in the price of crude because of uncertainty being introduced).

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But even if you are bullish on Venezuelan resources, it will take at least 10 years and tens of billions of dollars to bring that oil to market. And so far, despite U.S. President Donald Trump’s demands, the energy majors don’t seem eager to rush back into the country too quickly. Who could be, when there is little sense of what the political model there, and indeed in the U.S. itself, will be over the next decade?

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What is clear is that we’ve already hit peak oil production in the near term. Last September, the International Energy Agency reported that in 2024, around 80 per cent of global oil production and 90 per cent of natural gas production came from fields that had passed their production peaks. The report indicated that, barring any major new investment, production from existing fields would peak this year and decline rapidly — even with the use of water pressure injections and other techniques to squeeze out more production.

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At the same time, the IEA can now see a scenario in which oil demand continues to grow, because so many countries are backpedalling on their clean energy commitments (led, of course, by the U.S.).

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A potential longer-term supply and demand mismatch implies higher prices. Despite this, the net long position in oil held by hedge funds is exceptionally bearish compared with the last several years, and the strong consensus view in the market for the coming year is still quite bearish. We may be living in a “just in case” world but most traders still have a “just in time” view on oil, and they seem to assume there is no trouble on the horizon.