Chart of the Week - World Oil Demand

$WTI Crude Oil - main 2310(CLmain)$ $Micro WTI Crude Oil - main 2310(MCLmain)$ $Brent Last Day Financial - main 2311(BZmain)$ $E-mini Crude Oil - main 2310(QMmain)$

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I’m a big fan of using technical breakouts as a prompt to take a closer look at a certain asset or market (to then go and build out the rest of the picture) —but a less common approach is to look at breakouts in fundamental indicators. And this one is worth looking at.

The chart shows world oil demand (across all products, think: gasoline, diesel, jet fuel, LPG), what should be no surprise is the collapse in 2020 (as humanity collectively hit the pause button), and also should be no surprise is the subsequent stop-start reopening rebound.

But perhaps surprising is that we’re now set to return to pre-covid levels with a breakout to new all time highs in world oil demand (and for those who’re curious, it also marks a return to long-term trend).

I think this chart is worth highlighting for a couple of reasons. Firstly, it may be somewhat counterintuitive in the age of energy transition, ESG investing, and decarbonization — despite all the noise and best efforts of investors and activists, fossil fuels remain important.

But perhaps more interesting back in the blunt pragmatism of macro and markets, this fundamental breakout is likely going to underpin and reinforce an eventual price breakout. This is particularly relevant given the significant underinvestment in traditional energy supply...

While renewables are likely the way of the future (and I talked about the substantial valuation reset in renewable energy stocks to now slightly cheap in the latest report), fossil fuels are an important part of the energy transition.

You can’t transition to new energy if you can’t move around, grow and invest, or build anything of significance — and significant building needs to happen in terms of infrastructure, manufacturing, and generation development.

But one impact of the anti-fossil fuel movement is that it has starved the sector of capital. Who wants to drill new wells when none of the big investors want to touch traditional energy? (not to mention the social + political stigma)

So with oil demand set to continue to grow in the coming years, and supply investment remaining constrained, ECON 101 tells us: oil price go up. Good for energy stocks, bad for inflation, bad for bonds, bad for consumer.