Oil outlook: ‘It’s the non-OPEC supply that is really stunning,’ strategist says

Citi Global Head of Commodities Strategy Ed Morse joins Yahoo Finance Live to discuss the outlook for commodities in 2022 and how Brent crude oil is rising despite Omicron concerns.

Video transcript

- Brent Crude prices briefly topped $79 a barrel earlier. This is as concerns over Omicron are easing for now. Joining us to discuss is Citi Global Head of Commodity Strategy, Ed Morse. And Ed, always great to see you here. Let me just get your opinion on where oil prices are heading because you do have a little bit of a contrarian opinion as to what direction they're going in this year. We can call it this year, right now.

ED MORSE: Yes. This year is starting out with a little bit of ambiguity. Price has been up and down a little today. But basically, I think we're moving from a period that's been over a year in which we've had inventories drawing down not enough supply to meet demand to a period in which we're going to see, starting no later than the second quarter we believe, inventory is starting to grow around the world in an accelerated basis.

So we think this is going to be a year where prices are going to go down rather than up. And we're looking at Brent going from an average of over $75 a barrel this past quarter to maybe $10 or $12 or $15 lower than that by the fourth quarter of this current year.

- And Ed, obviously this is a bit of a contrarian view here. Talk to us about where it's coming from. In other words, why do you think we're going to see some supply build? Is it going to be because we are seeing perhaps weakening economic growth and weakening of demand? Or do you think it's just more pumping basically, to oversimplify it, on the other side?

ED MORSE: No, no. Demand is going to be not as robust as it was in 2021, but pretty robust as the recovery continues. And as you remarked, the pandemic is not probably as difficult on the demand side as people thought it might have been a couple of weeks ago, but it's on the supply side.

I'll set aside the issue of Iran which has about 1,300,000 barrels a day coming back in the market. The range of demand estimates for the year ahead are between 3.3 and 4 million barrels a day. That's down by close to 2 million barrels a day from 2021 versus 2020.

But it's the supply side that's responding. It's not just that OPEC is planning to bring back close to 4 million barrels a day between now and the end of the year. But it's the non-OPEC supply that is really stunning. And in the Western Hemisphere alone, we're going to see just a huge surge in supply from increased drilling.

We're seeing it particularly in the United States where we're penciling in, without including biofuels, 1.4 million barrels a day of growth. That's the mirror image of what happened in 2020 and 2021 when supply fell. We already have in the Permian Basin record production. And that's going to continue, in our judgment, across the country for the year ahead.

Between Canada and Brazil, we're going to see, in our judgment, 500,000 barrels a day incremental supply both in 2022 and 2023. So just between those three countries, including the US, that's an additional close to 2 million barrels a day. It doesn't include Suriname, doesn't include Colombia. It doesn't include Argentina or the OPEC country just to the South of us, Venezuela, where production is on the rise. And we're seeing the same from non-OPEC countries around the world.

So I think a lot of people are underestimating the efficiency of capital, how much more bang you get for the buck, even if we have spending on the downside from where it was at its peak. But we're expecting a 20% increase in capital spend in 2022 versus 2021. That should put the world over $400 billion in capital spending for finding and developing oil. And that's, in our judgment, more than enough to keep the supply pipeline growing for several years ahead.

- And Ed, just looking at your note here on your view of the commodities market, you're saying that there are going to be winners and losers. And exactly who are you seeing as the winners this particular year versus the losers?

ED MORSE: Well, we think the energy prices are going to certainly be lower whether you look at thermal coal, oil or natural gas. Natural gas, not in the United States, but around the world, has reached really record levels for LNG, record levels in Europe for reasons that we think are temporary.

So the losers are really the winners of the past in terms of headline inflation. That includes food and fuel. So the row crops are going to go down, particularly toward the end of the year after we get the summer crop in from the Northern Hemisphere.

The winners, we think, are going to be the industrial metals and the PGMs. Platinum and palladium needed for auto catalysts in cars, in car manufacturing, should continue to grow. And if there were one metal that we think is going to be stellar in performance it's aluminum. But in many respects, metals are seeing a supercycle ahead of them. That doesn't mean all of commodities will, but metals are critical for decarbonization whether you're looking at aluminum or copper or nickel or the other battery power elements.

So we think they have a bunch of very good years ahead, starting with when the recovery takes place in China post Chinese New Year and Chinese Olympics. So by second quarter, we think we'll see the metals responding the obverse of what happened to metals in recent memory and the obverse of what's happening on the food and fuel side.

- And Ed, forgive me. I just want to go back to energy for a moment because I want to talk about how your thesis plays into energy transition. That is, we're seeing more and more evidence of climate change and the effect it's having around the globe.

What effect is that going to have as we see those energy prices come down? I know you think, on the flip side, CO2 prices are going to go higher. So what does that do to the speed of energy transitions?

ED MORSE: We think, actually, that we're in the first crisis of the energy transition. European prices for power generation are up 6 to 800% across the continent. The UK is seeing utilities going bankrupt because of a lid placed on how much they can charge businesses and consumers. We think it's going to be a rocky road, this energy transition.

It's not clear whether we're going to see supply falling or demand falling faster when we get to the last half of the decade. The first half of the decade, we think, is going to be pretty oversupplied because of the residual investments that are taking place.

But between policies, on the one hand, which are aiming to reduce energy demand certainly, and energy supply as well, we think it's going to be a rough road between seeing which goes down first and faster, demand or supply. So we think prices are going to be volatile. It's not going to be a smooth transition by any stretch of the imagination.

- So we have to leave it there. But always appreciate your thoughts and you stopping by. Ed Morris, Citi Global Head of Commodities Strategy.