It's hard to overstate how insane it seemed earlier this year when Ed Morse of Citigroup predicted that oil prices would crash below $70 by year-end.
And yet that's almost exactly what's happened.
Yesterday, U.S. benchmark WTI crude oil settled at just $72.01 a barrel--a new low for the year. That's right; after all that's happened with soaring gasoline prices and concerns about shortages and the Russia/Ukraine war, the price of crude oil is lower now than it was at the start of the year. Crazy.
Not many people had that on their Bingo card, especially back in February when calls for oil to spike to $100, $150, even $200 a barrel were ubiquitous. But in an interview that was eerily prescient, Morse said that all the bullishness was wrong. He acknowledged that prices could spike in the near-term, which they did--to roughly $130 a barrel in early March--but Morse insisted that "we think you go short the end of the year."
How on earth could you think that? I asked him. Aren't markets tighter than they've ever been? No, he said, people were underestimating how much more supply would come online by now. He expected we'd be seeing big inventory builds, not shortages, and sure enough that's coming true.
Both gasoline and distillate stocks surged by two to three times as much as expected in the EIA's weekly report yesterday, and as one analyst told Bloomberg, "you only use crude oil for two things, to make gasoline and distillates." If you don't need to make more of them, it lessens demand for crude. Hence the price drop. Distillate supplies are up 25% from their mid-October lows, and crude prices have sunk by $20 a barrel in that same period.
It all means that even more relief is coming at the gas pump, which may be one reason retail executives have sounded rather upbeat lately even as the chorus of those warning about recession grows. Gas prices are just 30 cents away from falling below $3 on average nationwide, notes Patrick De Haan of GasBuddy. That's a far cry from the $5.01 average we were reeling from back in June. And De Haan thinks we could hit that $2.99 average on December 23rd or 24th; talk about a Merry Christmas.
There are larger macro headwinds, too, weighing on oil prices; the spread of Covid in China, which has lessened demand, being probably the key one. But it's still impressive that prices have collapsed even as the dollar has weakened and investors are speculating the Fed might start backing off of sharp rate hikes.
In fact, the one thing that investors worry about is that those factors (a weaker dollar, a more dovish Fed, a rebound in Chinese demand) could start to push crude back to $100 a barrel again, perhaps in the new year. But before jumping ahead to that possibility, let's acknowledge that Citi's Ed Morse had one of the greatest calls of 2022.
See you at 1 p.m!
Kelly
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