Let It Burn (Oil Market Edition)

The oil market appears to be following the same playbook as the US natural gas market. Let it burn...

What's interesting about the oil market's sell-off that's different from the natural gas market is that there's OPEC+, which can reduce production to match rising or falling demand. For the US gas market, there are no cartels, so prices had to reach the point of shutting in production to push supplies lower. There are also other fundamentally different dynamics in the oil vs natural gas business (such as storage, transport, etc). But it is clear to me that the market is believing its narrative (surplus in 2025), and will choose to push markets to extremes.

There are major ramifications arising from this, and the reflexive feedback loop of the oil market will almost guarantee that non-OPEC supply growth in 2025 disappoint to the downside.

Sensitivity to Price

In our WCTW yesterday, we wrote about how non-OPEC supply growth at $65/bbl WTI will result in a decrease of 350k b/d to 500k b/d. One important reason why this is the case is that because of the servicing cost inflation the oil patch saw since the 2016-2019 period, real crude prices are near $45 to $50/bbl today.