Page 11 - ISQ - April 2022

INVESTMENT STRATEGY QUARTERLY

hold a presidential election has broken down); Yemen (the Houthi
rebels continue to fire missiles into neighbouring countries); and
Iran (progress in negotiations toward a new nuclear agreement is “ The war has dramatically raised the
uneven, at best). issue of energy security on the agenda

SUPPLY AND DEMAND FUNDAMENTALS across Europe. ”
It is equally true that the underlying oil market fundamentals —
good ol’ supply and demand — are as bullish as they have been
over the past decade. Our global oil market model points to
inventories declining by approximately 2 million bpd in 2022. for drilling activity to provide a meaningful boost to supply. For
When inventories are declining, by definition it means that North American shale, production uplift will remain muted until
demand is outstripping supply. Demand in 2022 is back to the 2023. For oil-producing regions with mostly long lead time pro-
pre-COVID peak of 100 million bpd. Meanwhile, OPEC has jects, such as Brazil and West Africa, it will take even longer.
remained very consistent with its roadmap of gradually bringing
production back to pre-COVID levels by September 2022. Capital ENERGY TRANSITION
spending by the world’s oil and gas companies is finally recov- The oil industry may be tempted to celebrate that good times
ering from the ultra-austere levels of 2020-2021, but the industry’s are back again, and indeed it is the case that profitability and
commitment to capital discipline is firmly in place. Management free cash flow metrics are currently very strong. But high oil
teams are accommodating long-standing shareholder demands prices on a prolonged basis will carry an unavoidable side effect:
for less production growth and instead more emphasis on divi- accelerating the energy transition, away from fossil fuels. Gov-
dends and share repurchases. Even for those companies that are ernment policies vis-à-vis climate change (such as carbon taxes
willing to substantially increase capital spending, it will take time

Russian Oil Exports

Russia produces ~11 million
barrels/day, of which ~3.5 million
are retained within the country,
and ~7.5 million are exported to Total Russian oil production
Europe and the rest of the world. ~11m barrels/
day

3.5m retained in Russia
4m exported to Europe

Russia 3.5m exported to rest of world

Rest of
the world

Source: Raymond James Research

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