Global growth is slowing. That’s what we’re all saying. Well that’s what the quants and the macro funds are saying, and that’s what Wall Street sell side is saying as well. Pick any one, let’s just use Goldman Sachs for a second, and they’ll say yes, we’re slowing. Global GDP growth for 2021 is now down to +6% (from +6.4% and consensus +6.2%).
Reason? Take your pick, inflation, Delta variant, supply chain disruptions. All three. Now that may not seem alot, but it’s mostly driven by Q3 global growth falling. How much of a Q3 headwind?
That is, Q3 growth will slow from 9% to 5.5% YOY (agains using Goldman’s figures). Now reducing global growth by 3.5% isn’t to be scoffed at, it does represent nearly a third of the growth we expected in Q3, and it makes sense given the spread of Delta globally. Since our oil consumption is give or take 98M bpd today, then logically for this one quarter, slower growth could translate to make a million barrels of consumption shaved off for this quarter. Sure, that would make sense, Delta will cause some impact, so a million sounds about right. What do the paper markets do to oil though? This . . .
What that is, is a wholesale takedown of crude prices, WTI to be exact. A free fall of 15% from the low-$70/barrel range to the ~$62/barrel range in 3 weeks. If global growth slows, then oil should be the first to suffer. We understand the logic to some extent, but that? No.
Now mind you, Capital One published a report on Friday that indicates the sell-off is equivalent to an assumed 4M bpd of demand hit . . . for a 3.5% reduction in global growth in one quarter and a 0.4% reduction in global growth for the year? That’s what we’d call an asymmetrical reaction.
4M bpd though, that seems like an awful lot for a world that’s muddling its way through the Delta COVID pandemic. Yes, we agree that growth is slowing a bit, but it is slowing from our torrid Q2 pace of recovery. In the US, we can see it in the data as the stimulus savings waned, and people shifted spending from goods to services, but not in full. Then as enhanced unemployments benefits ended and inflation and Delta cases rose, retail sales, consumer sentiment, manufacturing sentiment began dipping.
Globally, credit impulse started falling as well (i.e., the issuance of new credit relative to GDP). Translation, less liquidity, less “juice.” Coupled with increasing COVID cases in Asia Pac, and we have a world where the emerging markets (including heavyweight China if it can still be considered one) began slowing in Q3. Still though, have they slowed so much as to justify the oil plunge? Are things as horrendous as it appears, or that the market thinks? No . . . because, here’s the thing . . . slower growth is still growth.
In turn, that growth translates to movement and more of it. It’s odd right? Delta cases are at all-time highs and in some countries, positive cases in the current wave exceed prior COVID waves. You’d think people would reenter lockdowns or slow their economic/social activities. For the most part though, that just hasn’t happened. Energy inventories are a proxy for that. Moving people and things takes energy, and that energy comes from fossil fuels. So are we slowing? Perhaps, but it sure isn’t appearing to be material because int he US we’re seeing this . . .
Our consumption of fossil fuels continues to ramp higher despite the Delta variant. We’re continuing to shop, vacation, buy, move and manufacture things. If you think our 2021 YOY figures look better because we’re comparing them to 2020 trough years, think again. The graph above compares 2021 figures to 2019.
Heck if retail inventories are any indication, as we approach the holidays, we’ll need to make, buy and move even more things around the world. It’s not just for the holidays mind you . . . our store shelves are bare for any occasion and historically so.
Even with the heightened COVID restrictions in the Asia Pacific and the supposed material impact on demand (remember Asian countries have lower vaccination rates and Delta cases began picking up before developed markets) and t cases began picking up before developed markets), we continue to see global stocks drawing. It’s not just the US, but globally we’re still consuming. The prior pace of ~1.5M bpd of total liquids drawing since the beginning of the year continues.
We’re tracking half of OECD inventories above, and that’s what we’re seeing week-to-week. It’s only half you say? Well, lets zoom out further via satellite and even Goldman sees roughly the same level of draws as a whole.
So again, everyday . . . 1.5M barrels of liquids are disappearing from inventories, even while growth is “slowing.” What’s even more interesting is that the pace continues undeterred as OPEC+ adds barrels to the market and China floods the market.
Surprisingly, in the past four months, China has released ~85M barrels from its strategic petroleum reserves (“SPR”) between April to July (Energy Intelligence) to the commercial market in an effort to lower oil prices. We can see the release clearly in our satellite data and we’re witnessing Chinese stocks yo-yo from ~800M barrels in early ‘20 to ~935M barrels in Q2 ‘21, and now back down to ~860M barrels today, effectively burning through a majority of its COVID stockpiling last year.
So on one hand we have demand climbing (albeit tempered recently by Delta), and on the other we have insufficient supplies and price distortion. Eventually/inevitably, China will have to not only stop draining its SPR, but likely rebuild it, which could add to demand in the coming year. So while prices have fallen, so has inventories, and those two things can’t coexist forever.
The Beginning of the Endemic
Which is to say that something is amiss, and we think that’s the calculus for COVID. The physical market is showing signs of tightness, but the paper/financial oil market is concerned with global growth and Delta. Yet, notwithstanding higher cases and increased media attention, vaccinated and unvaccinated individuals are now boldly going forward with their lives, even if their confidence stems from vastly different places.
Still, that shift in mentality (i.e., carpe diem) has allowed politicians to minimize healthcare restrictions and prioritize the economic wellbeing of society over individual health and our healthcare system. On balance economic considerations are outweighing health concerns, and it’s something we anticipated earlier when we wrote:
In the near term, we believe that the political and social appetite for further lockdowns or restrictions has waned. The Overton Window (i.e., politically acceptable mainstream policies) has shifted. With widely available, efficacious, and free COVID vaccines, the majority of the populace will begin to view COVID as a “voluntary disease” so unless new variants spike hospitalizations and deaths (they are currently not), then the world will begin to live with COVID, and focus on the nascent social and economic recovery.
This has largely come to pass as health restrictions are mild in most areas and nonexistent in others. Consumer sentiment has deteriorated as cases, hospitalizations, and deaths have risen (and perhaps to some extent the ending of enhanced federal unemployment insurance in half of US states), but politicians have been firm in their push for further economic reopening. Their focus has been shifted to increasing vaccinations.
Therefore, with fewer health restrictions, the economy has continued to recover. For the most part, people are back to doing what they want to do. The last leg of the recovery will simply take a little more time in developed markets as Delta fades and the last vestiges of restrictions (e.g., international air travel) fall.
For emerging markets and Asia Pac specifically? That’s about to begin as those countries start their recovery process. India is already recovering as COVID cases collapse.
China’s recent COVID outbreak is also receding as the government re-ran its zero tolerance “Guangzhou playbook” from June and implemented tight local restrictions. It appears to be working as reported symptomatic cases have fallen to zero as of April 20th.
As cases stay low/zero, it’s only a matter of time before China loosens its restrictions, and recovers into Q4. The mid-autumn festival this year is September 21, so that’ll be the first test. We anticipate China will slowly unwind in the coming weeks ahead of the holiday.
Running into the Year End
So where does all this leave us? The same place we’ve long believed we’re in. A tight-oil environment, one that hasn’t fundamentally changed in the three weeks it took for oil to decline by 15%, and one that is set to increasingly tighten as we head into year-end. The decline in oil prices will simply exacerbate the situation. It will place added pressure on US producers to stay capital disciplined, force OPEC+ to reconsider its tapering, and create further financial headwinds for everyone else.
Moreover, our collective reactions to the Delta wave are giving you a preview of how we’ll react politically, socially and economically to future COVID variants. Unless the virus becomes deadlier, the days of lockdowns are passing. As the pandemic transitions to an endemic, we’re beginning to see well governed countries like Germany and Singapore begin to plan for “life with COVID” as the former will no longer pay for COVID tests after October, and the latter plans to stop counting cases.
In the US we can already see it heading in that direction as social restrictions for this third wave/Delta variant have been minimal. It’s simply up to each of us to decide how we’ll want to get our antibodies (i.e., via infections or the vaccine)s. In the end, for most, it will likely be a mix of both. This is a coronavirus after all, one that is easily transmissible and will eventually touch almost everyone. The question just becomes, how do you want to “level-up” your immune system to respond. We’re still holding firm on our initial call that US cases will begin declining next week and we’re at the tipping point. As cases roll-over and vaccinations climb, COVID will fade.
As for oil, we know we are all still collectively moving. We know things have slowed slightly, but not materially so. We believe falling inventories will force global physical buyers to step-in and source October-December barrels, and such buying will come from all regions because Delta’s decline will occur nearly simultaneously worldwide. We further anticipate that an increasingly tight physical market will swing the momentum in the paper market the other direction. Momentum will work both ways, but what ultimately governs is fundamentals. If our analysis is correct, we anticipate oil to climb above $80/barrel by year-end.
Do we have any major concerns? Sure, one of them is China. We’ll have to see how well they reopen in 2022 (i.e., due to vaccine efficacy), but we’ll leave that issue for another time. So to paraphrase that old saying, we have many worries, but slowing global growth and Delta aren’t two of them.