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Running Out of Spare Capacity

Running Out of Spare Capacity

Global oil markets could not have looked grimmer than back in the summer of 2020. COVID cases were increasing again and further global economic lockdowns were being threatened. Only two months before, oil prices had crashed into negative territory for the first time in history as global inventories had surged and threatened to overflow. Between the never-ending pandemic and electric vehicles, common investment wisdom believed oil demand was in secular decline, bloated inventories would remain elevated forever, and oil prices would never recover.

At Goehring & Rozencwajg, we love to undertake in-depth insightful research that identifies newly developing investment trends and often comes up with conclusions that differ vastly from consensus opinion. Our goal is to share these results with our investment clients and partners at least twelve months before they become headline news in the financial press. This is an ambitious goal and we don’t always get it right. However, the satisfaction in recognizing trends long before the general investment community not only brings large profits to our investors, but a huge amount of professional pleasure to us as well.

To that end, we titled our 2Q2020 letter “On the Verge of an Energy Crisis”. At the time, no one agreed with us. Now headline after headline talks of an “unforeseen” energy panic. It looks like the energy crisis we discussed 14 months ago is now here.

If the energy crisis has arrived, where does Goehring & Rozencwajg see things 12 months from now? By the end of 2022, we believe global oil demand will have exceeded pumping capability for the first time in history. Just as no one agreed with our assessment of an emerging energy crisis this time last year, almost no one agrees us today either. Instead, conventional wisdom strongly believes OPEC spare capacity will be returned, eventually throwing the market into huge surplus in 2022.

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