'Never Before Seen' Oversupply Of Oil To Collapse Crude Price? | Doomberg & Paul Sankey

Following the Ukraine invasion, dollar-oil correlation flipped from negative to positive because the US became the world's dominant hydrocarbon supplier (both oil and coal), making oil price increases beneficial for the US economy and dollar strength rather than harmful as under the old petrol dollar model.

“if you look since the Russian invasion of Ukraine which makes perfect sense and it's wonderful when this happens on a chart and you can realize what's happened you actually flip from a negative correlation of oil to the dollar to a positive correlation because the massively increased unintended consequence of Putin's invasion was to make the US the dominant hydrocarbon supplier in the world and we do a good job in Coal as well by the way”

The original petrol dollar deal (1970s) required Saudi Arabia to recycle oil profits into US Treasuries, keeping US interest rates lower than fiscal deficits would otherwise require; in exchange, the US guaranteed open trade and naval protection of maritime oil routes, creating a mutual interest structure.

“the deal was that the the Saudis would recycle their profits from oil trade into us treasuries and then the us as sort of the reserve currency and also the issuer of the neutral Reserve asset in the sort of settling of international trade um required that that the excess profits from oil would be recycled into those treasuries that kept our interest rates lower than perhaps our deficits or our monetary policy uh would otherwise indicate if we were say an emerging economy and so on and um and in exchange of course the US protected the the open and free trade of oil um across various Naval choke points around the world”

Long-cycle oil projects (10-15 year development) like those in Guyana, Brazil, and Canada are low price elasticity producers that will produce regardless of price once committed because they are also low break-even cost producers (Guyana projects profitable at $30 Brent), creating structural oversupply even at current $80 prices.

“a lot of that oil outside of OPEC is long cycle oil so that's oil that essentially you develop on a 10 to 15 year view for example in Guyana and once you develop it once you're committed to development you produce the oil regardless of price”

Intermittent renewables with low energy density, questionable energy payback periods, and dependence on China for key supply chain components (polysilicon, cells, wafering, machines) represent the totality of the green energy agenda's practical alternatives to fossil fuels and nuclear.

“your only alternative is to replace them with intermittent Renewables that have low energy densities questionable energy payback periods and are totally um dependent upon China for Key Supply Chain choke points”

The green energy agenda is fundamentally incompatible with democracy because decoupling from both fossil fuels and nuclear energy without deep cuts in standards of living is impossible, and lower living standards are unpopular in democracies which are popularity contests.

“there is a fundamental sort of axim here that gets ignored or is underappreciated which is that the green energy agenda is fundamentally incompatible with democracy um why you cannot decouple from fossil fuels and nuclear energy certainly unlikely you could decouple from fossil fuels but you can't decouple from both um without deep Cuts in standards of living um lower standards of living are deeply unpopular and democracies are popularity contests”

Saudi Arabia's oil exports to the US have declined from roughly 3 million barrels per day 10-15 years ago to approximately 300,000 barrels per day today, reflecting US energy self-sufficiency from shale and Saudi's strategic reorientation toward Asia (India, Pakistan, China).

“the Saudis and the Chinese are doing their own deal I think the Saudi is very uh is very oriented towards the east now and is you know barely supplying oil to the US any longer in fact it's uh it's down I think to to as little as 300,000 barrels a day from you know close to 3 million barrels a day maybe 10 or 15 years ago I'd have to check those numbers but they're they're not crazy”

Russian oil and oil products have remained at the same pre-invasion levels despite sanctions because routes have shifted, so the physical impact of bringing Russia back into global markets through peace would likely be more on sentiment than reality, though gas-to-Europe dynamics matter since Nordstream is effectively destroyed.

“you've got to remember that Russian oil and and and oil products have remained you know basically at the same levels as they were pre The Invasion it's just all the roots have had to shift with sanctions so the impacts of the physical impact of bringing Russia back in would likely possibly be more on sentiment than on reality but of course there is the issue of of gas to Europe and as you know the nordstream is effectively completely destroyed”

The currency in which international transactions are denominated is less important than how trade imbalances are settled; replacing US dollars with US Treasuries and transactions with imbalances reveals that all roads lead to gold, explaining recent gold strength.

“the currency in which various international trade agreements or transactions uh is denominated in isn't as important as how imbalances in trade um are settled and I think if you replace um US dollar with us treasuries and you replace uh transactions with imbalances you all roads lead to gold which I think explains why gold has been on a career lately”

The energy challenge is a major election issue between Conservative and Labor in the UK, with both sides having shifted the policy axis back toward accepting fossil fuel and nuclear necessity.

“in the UK as well in fact this whole issue has become a major issue for the election between conservative and labor and I think both sides have basically shifted the axis um back now”

When someone buys an EV in the US, an internal combustion engine vehicle is sold to the used car market, and at the end of that chain is exported to the third world where it's considered an extreme luxury; the life expectancy of an ICE in the US is 12-13 years, but after that many are exported directly or through parts combinations to the developing world.

“what happens when somebody buys an EV in the US well that means that a internal combustion engine vehicle is then sold on the used car market and then at the very end of that chain um a used car vehicle is then exported to the third world where it is considered an extreme luxury and so um we wrote a many moons ago I forget the name um but the the the life expectancy of an internal combustion engine in the US is might maybe 12 13 years but then after those 12 or 13 years um a good many of them either directly or through sort of a Frankenstein um Parts uh combination there's a whole ecosystem of people who export um endof life cars from the West which become um a huge uh increase in the standard of living for the boons of people who are um strug in the emerging economies”

The word missing from the environmental debate is 'tradeoff'—the conversation is not framed as 'how much of our standard of living are we willing to sacrifice for potential carbon reduction' but rather as a false choice between current living standards and a saved planet.

“the word that's missing from the environmental debate is tradeoff we don't talk about tradeoffs um and if we did we could have an adult rational conversation of how much of our of living are we willing to sacrifice in the name of carbon emissions that might hurt the planet or might not hurt the planet 40 to 50 years from now”

Doomberg's postulate: every molecule of fossil fuels produced in the world will be burned by somebody somewhere; local restrictions against such activities only change who gets to enjoy that privilege, so oil displaced from the West through policy is consumed in the developing world.

“every molecule of fossil fuels produced in the world will be burned by somebody somewhere and um the local restrictions uh against such activities only change who gets to enjoy that privilege and so there's a there's billions of people in the world that live on less than a fifth of the btu footprint that those of us in the west get to enjoy”

Trump successfully pressured China not to buy Iranian oil during his first administration and stated that as a result Iran was 'flat broke,' and he indicates he would repeat this policy in a second term.

“he told the Chinese not to buy a single barrel of Iranian oil and they didn't and he said nobody else did either and as a result the Iranians were flat broke as a result of the Trump presidency and he's talking very much as if that's exactly what he'd do second time around”

The IEA's forecast that oil demand will gradually slow and peak by 2029, plateauing after, with global oil supply reaching 114 million barrels per day by end of decade (8 million barrels above demand) is using production capacity figures rather than actual production, which is an important distinction in analyzing this claim.

“the 114 million barrels that you quoted it in that article actually uh the ia's quot in capacity um not production which is a really important um you know arich to put on all of this analysis”

The IEA's oil demand forecasts are self-defeating because if 8 million barrels per day of spare capacity actually materialized, you would have to price that capacity before you arrived at it, making very low oil prices required to balance supply and demand.

“there was always a major problem which was price so essentially the prophecy is totally self-defeating anyway because if that really happens it won't happen if you know what I mean because if you were to have 8 million barrels there spare capacity globally uh you would have to price about 8 million barrels day spare capacity before you got there because that would be way too much”

Oil demand and supply balance is an upward-sloping sine wave that grows 2% per year; it has done so for 50 years and will do so for the next 50 years.

“the oil demand Supply sort of balance is an upward sloping sine wave that grows 2% a year um it has done so for 50 years and will do so for the next 50 years in our view”

The definition of oil is expanding to include light liquid hydrocarbons and natural gas; engine switching is occurring (e.g., one in three long-haul trucks in China now powered by natural gas, natural gas demand in shipping up tenfold year-over-year in Singapore), and an estimated 800,000 barrels per day of diesel have been displaced in China alone from switching to natural gas.

“we're seeing the definition of oil expanding to include um light liquid hydrocarbons and natural gas itself we're seeing um engine switching um I would note that a really interesting article hit in Bloomberg last week which said that one out of every three Long Haul trucks in China is now being powered by natural gas and the demand for natural gas in the shipping industry has up tenfold in Singapore year-over-year”

California is losing gas tax revenues from EV adoption and looking for ways to supplement them through road taxes, but suppressing EV prices via government subsidies, HOV lane access, and fuel tax exemptions distorts the true cost of road maintenance, which becomes a problem when heavier EVs cause faster road wear.

“in order to stoke the initial demand for EVS um copious amounts of government funding via tax credits or um you know getting to ride in the low occupancy Lanes or uh High occupy Lane sorry and and and not having um to pay you know um taxes on on fuel and so on um these things are of course government interference in an otherwise free market and what you have when you suppress prices is you temporarily increase demand for those products but now ultimately the roads which by the way heavier EVS tend to um cause wear a little quicker um these roads that still need to be repair somebody still needs to pay that and and the the the challenge is if you're going to put that upon the ERS of the EV drivers that makes the artificially low price of EV slightly higher which then of course runs counter to the desire to increase their Market penetration”

The global South will begin consuming more oil because it's cheaper and more readily available, and energy is life; 6-7 billion people living well below Western standards of living would happily burn $20-40/barrel oil, which would be the outlet for supply in an oversupply scenario.

“the way we come out of what Paul just described which by the way I wholeheartly agree with is of course the global South begins to consume more oil because it's cheaper and more readily available to them and energy is life and everybody would like a better life and you can't impose order on your local environment without creating waste Heat and the way you do that is you burn hydrocarbons um and so what we would see on the back end is the six or seven billion people that live well below our standard of living as measured by BT per cap would happily and greedily burn 20 30 $40 $40 a barrel oil um as much as we could Supply to them”

Canada's target of 100% zero-emission vehicle sales by 2035 with interim targets of 20% by 2026 and 60% by 2030 reminds Paul of Stalin's Five-Year Plan, which was internally inconsistent and mathematically impossible; California tried an all-electric vehicle standard in the 1980s and never met it before canceling it.

“it reminds me a little bit of when I was in college and I was studying modern economic history and we had to study Stalin's Five-Year Plan you know and the the professor was all excited because he could prove that Stalin's 5-year plan was actually uh internally inconsistent and could not be mathematically achieved let alone really achieved um you know you have to remember that California had an all electric vehicle standard in the 80s and they got nowhere near meeting it and canceled it”

Consumers don't have the appetite for EVs outside of China, where as a totalitarian state you can impose comprehensive energy policy; if you could be a dictator of the US for one year, you could make enormous differences especially given politicians' ignorance of energy.

“it's clear that consumers don't have the appetite for EVS outside of China where further to doomberg point about democracy you can have a very comprehensive energy policy because you're a totalitarian state you know and you can argue that if they would only make me the dict of the US for I promise I would only do it for a year we could make it doomberg could do it too it could make an enormous amount of differences especially given the ignorance of politicians uh regarding energy”

In the solar industry, China illegally stole all Western intellectual property 15 years ago and now owns 95-99% of key choke points in polysilicon supply chain (ignots, wafering, cells); the US is now trying to rebuild its polysilicon supply but cannot because China controls 100% of the machines needed to install factories.

“we allow China to illegally steal all the intellectual property of the western believe me I was in the industry when this happened 15 years ago and they own 99 to you know 95 to 99% of key choke points in the early parts of the polysilicon supply chain including ignant and wafering and and cells and then now we're like um on the one hand with the inflation reduction act mandating that we install all this solar and then on the other hand trying to impose tariffs um on on on the Chinese Supply which is the only game in town because we let them win and then I I read a fascinating article a couple weeks ago um we're trying to put tariffs on China in the US so that we can rebuild our homegrown po silicon supply chain that we never should should have let get taken over in the way in which it was but we can't because China has 100% Supply on the machines that you need to install in your factories”

The US unconventional revolution (shale oil and gas production) has made the US the biggest oil and gas producer in the world, which is wildly underestimated in importance; this happened 10-20 years after the original petrodollar agreement, making the agreement less relevant than it was.

“they certainly would have greatly weakened the dollar if the US hadn't had the US unconventional Revolution which is you know wildly underestimated in my opinion in many people's view of the world including their view of the importance of this so-called Saudi agreement because in reality it's not that relevant anymore more because the biggest D gas producer in the world by some way is the United States of America and that was a very long way from the truth not only 20 years 30 years ago when the steel was signed but also um just 10 years ago so the change has been absolutely remarkable”

The US and EU are putting tariffs on Chinese EVs (Biden pursuing 100% tariffs on Chinese EVs, EU 17-38% depending on producer) because of union pressure from Volkswagen, GM, Ford; but China's EV technology is stolen from Western automakers and is sold at 1/4 to 1/5 the cost, so the tariff war is lost before it's fought.

“China's strategy when it wants to dominated industry um entice the Western Market leaders into their uh uh into their country steal all their technology um take the best of everybody's technology and put it in one domestic state-owned Enterprise local champion and then they dominate the world and that's exactly what we've seen in EVs and the reason why we're putting up these tariffs of course is because of the strength of the unions in the Volkswagens and the General Motors and the Fords of the world M um this is a major problem we've this is an exercise in barn door closing by the way because again these large um Western automakers are capitalized to sell to the world and the global South will happily buy stolen technology from China at one fifth of the cost or 1/4th of the cost or onethird of the cost than what we could do over here with our environmental standards and our labor standards and so we've lost that war”

The IEA's leadership has taken a decidedly political stance and the organization has lost reputational impartiality and data quality over the past 5-6 years.

“the leader of the iea um has taken that organization to a decidedly uh political stance it used to be known for its impartiality and its data quality and both of those things have dissipated at least reputationally in the past five to six years certainly since um he he became uh the president or whatever his title is um of the IH”

OPEC is reaching a critical point where its members will begin cheating measurably as oil reaches equilibrium and geopolitical risk leaks out, because spare capacity quotes depend on differentiation between cash break-even and accounting break-even; this could result in a domino effect where one member cheats and everyone follows.

“OPEC is is reaching a critical point which is how we open this whole conversation really um which is um who amongst them is going to be the first to cheat measurably um because as as oil begins to reach equilibrium and geopolitical risk leaks out um the spare capacity quote unquote you know as we were talking about earlier you know the consolidation in the perian means that we have adults in charge now of the spare capacity but even there and in Guyana and all the other places that we've mentioned when you know that the price that you need to be profitable at is different than the cash profitability right and so does the incremental barrel of production bring me more cash than I had for that even though from an accounting perspective I quote unquote lose money the cash Break Even price um is much higher than the profit Break Even price from a gap accounting perspective and so the the temptation to produce the marginal Barrel because I have a you know uh domestic funding need to take care of or I've got some people I need to pay off so that my position and power is secured um we're getting to the point now where the game theory within OPAC which always happens when they are losing incremental Market power which they are today um could resolve result in a sort of a domino effect where one side cheats and everyone else decides to cheat and and the entire point of the cartel at least is undermined temporarily”

New Zealand, the UK, and other jurisdictions are reversing certain green policies because they've realized going to zero on domestic energy supplies is a mistake; this is partly due to recognizing energy security challenges and the decision to reframe the 'S' in ESG as standing for 'security' after the Russian invasion of Ukraine.

“I think that there were two things that that changed and the biggest was obviously the Russian invasion of Ukraine uh Jane I've embarrassed myself I forget her surname but she's the CEO of City Group um I want to call her Jane or Jan I apologize for not remembering her surname um she described ESG as now that the the s in ESG stands for security and I thought this was you know a brilliant comment that really summed up the fact that a lot of places like New Zealand you mentioned where you had a domestic a relatively small domestic energy Supply realized that to go to absolutely zero would be a big mistake”

OPEC's stated desire to add more oil production was met with a bearish market reaction because the spare capacity issue is about how long Saudi Arabia is willing to hold over 2 million barrels of spare capacity rather than produce it, and the resumption of growth in UAE (traditionally Saudi's biggest supporter) has dwindled because Iran, Venezuela don't have quotas and Iraq is barely included.

“OPEC had just had their meeting where they kind of put out a road map for how much they'd like to produce I think you could say I mean it's controversial uh the market reacted very bearishly to OPEC wanting to add more oil and the reason for that is partly the spare capacity that you just referenced has always been an over and it's just a question of how long Saudi is prepared to hold over 2 million barrels of they have spare capacity rather than produce it and the resumption of growth in UAE who traditionally has been saudi's biggest supporter within OPEC so the biggest single Saudi supporter within OPEC which is pretty dwindled now by the way because you don't have a quota for Iran um you barely include Iraq in fact”

The only realistic way to prevent structural oil oversupply from driving prices well below $60, potentially to $50 or lower, is through sanctions on Iranian exports or through reduction of US Shale production, both politically challenging in current contexts.

“there's a traffic accident that's simplicit in oil and as I said to start the only real big way of getting around the supply problem because it is an excess supply problem is going to be by stopping Iranian exports or by reducing activity in the US Shale and that's going to be a tough price probably well below 60 below 50”

Germany and the UK are both experiencing standards of living reductions as a result of green energy policy implementation, while India's economy is booming specifically because it greedily consumed every barrel of Russian oil available under sanctions, demonstrating the relationship between hydrocarbon access and economic growth.

“that's what we're seeing in Germany that's what we're seeing in the UK um and the flip side of that I would argue is India who has greedily lapped up every barrel of oil from Russia they can get their hands on as a consequence of the sanctions and uh their economy is booming”

The only conspiracy in oil is a conspiracy of ignorance on the part of consumers; people are now much better informed and realizing that if they want an iPhone they need gas-fired power and are still dependent on coal, which is why green policy is losing support.

“we always said the only conspiracy in in oil is a conspiracy of ignorance on the part of us consumers and um you know I think that now people and and greter I think has done a huge part of this is people are actually much much better informed and making that recognition realize that you know if you want to have an iPhone you're probably going to have to have a lot of gas fired power and you're already at this moment still dependent on coal”

The biggest single reason why EV standards will be impossible to meet is that people don't want to buy EVs.

“it's going to be impossible to meet these EV standards and the biggest single reason will be that people don't want to buy them sorry I don't mean to inter I don't mean to interject but I'll but”

When Chinese Communist Party decides it wants to own a supply chain, it plays to win without respecting Western rules; the theme of China dominating supply chains appears across multiple recent analyses.

“when the Chinese Communist Party decides it wants to own a supply chain they play to win they don't play by rules that we respect and we lose I want to move on to another topic now and finish off here the petrol dollar there there seems to be a lot of Mis misreporting on the internet on social media”

The petrodollar agreement between US and Saudi Arabia is controversial about whether it actually existed; Saudi currency remains pegged to the dollar and functional currency for global oil industry (investments, sales) is dollar-denominated, including historically Russian gas exports to Europe.

“the terms whether there was an agreement or not and everything else is quite controversial and it's actually on my list of things to really dig into as to whether this existed or not um you know as you mentioned the crucial point is that Saudi currency remains pegged to the dollar and the functional uh currency of the global oil industry which would be uh you know making Investments and everything else as well as selling the final product to each other is essentially all dollar denominated and can be you know surprisingly dollar denominated such as historically Russian gas exports to Europe weirdly enough wor dollar denominated”

Technological improvements globally and AI in particular will put downside pressure on oil from both greater efficiency of use and greater supply, suggesting oil is under pressure from both demand and supply sides.

“I would add a further point which is it's quite logical in terms of the ongoing technological improvements we see globally with AI being the obvious current example that oil would come under pressure from both sides both from greater efficiency of use which you know is already very weak it can only get better particularly in the US so you get more efficient Demand with it with technology and you also get much more Supply and that does seem to be playing out”