1. Pre-covid demand was 100m bbl/day, while current demand is 95m bbl/day. OPEC+ and Neutrals are currently producing about 90m bbl/day, with spare capacity of 10.5m bbl/day. If demand continues to climb, supply side will start losing firepower over oil prices at 105m bbl/day.
2. Significant policy intervention from Green Wave and ESG is instituting capital discipline on shale. Tier 1 US shale oil inventory has been depleted, Tier 2 soon will be as well. Shale breakeven has risen to about $66/bbl, and continuing price pressures keeps existing shale players focused on profitability over growth/CAPEX. If oil prices increase, CAPEX won't ramp up as quickly as demand. Backwardation means that shale producers who rely on reserve-based lending have to keep drilling at lower forward prices to spot, further depleting capital capacity.
3. Long-cycle producers (e.g. deep sea) have been starving for capital since 2014. They are now entering a "wedge" period where the capital investments from the previous 6-7 year cycle have depreciated, but raising new capital is hard/expensive.
4. Production from (Non-OPEC+ and Non-US sources) have stagnated for the past decade at around 33m bbl/day.
5. Hence the only incremental source of supply can come from OPEC+. However in point 1, we can see that their maximum capacity is likely to hit saturation point at 105m bbl/day. Beyond that oil prices will be elastic.
6. EV adoption is slower than expected. In China, the fastest growing EV market, EV adoption is 25% below previously forecasted rates. Hence it is unlikely EV adoption will materially impact oil prices in the next 5 years, ceteri paribus.
7. Putting it all together, we might see oil prices spiking over the next 3 years before widespread EV adoption manages to hit critical mass levels. However OPEC+ will not allow oil prices to return to $150/bbl levels, as that would simply accelerate EV adoption. A conservative expectation would be $80-$100/bbl around 2024.
8. Oil is a good inflation hedge because Oil & Gas together makes up 50% of total commodities trade and inventory values. The lower deciles of society are going to be primarily impacted by rising commodity prices (not Bitcoin), and as an OPEX commodity oil prices track consumer demand better than CAPEX commodities (lumber, steel) or store-of-value commodities (gold, silver).
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