This Is What Needs To Happen for Oil Prices to Finally Come Down

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, you know what was really crazy?

Tracy Alloway (0:19)

I'd, again, you're gonna have to narrow that down a little bit, but what is really crazy?

Joe Weisenthal (0:27)

Do you remember that day when oil went to negative $40 a barrel?

Tracy Alloway (0:31)

Oh, yeah, it feels like absolute ages ago, because I guess it was, I guess it was in April, 2020 And I do remember, partly because a bunch of people started tweeting at me about whether or not they should buy oil and store it under their bed or in their basements or something.

Joe Weisenthal (0:48)

Oh, right, I guess because you're the only person, anyone knows who has ever actually acquired physical oil.

For listeners who don't know, Tracy had it next to me on her desk, a bottle of oil. And apparently it wasn't good to get into there.

Tracy Alloway (1:01)

Yeah, a bottle of extremely toxic oil.

So the short answer is, had you bought oil, in April 2020, you probably would be doing reasonably well right now, because oil prices have gone absolutely bonkers. But that said, storing oil is a big hassle and I wouldn't recommend it to anyone. But yeah, it is kind of crazy how we've swung from people wanting so little oil that, you know, they're actually almost paying people to take it off their hands, to now people seemingly cannot getting enough of it.

Joe Weisenthal (1:37)

That was so insane. It's actually, the more I think about it, the more crazy that time was. But exactly right. You know, there's only so much oil storage capacity.

And if demand just essentially goes to zero in a matter of weeks, then suddenly you might have a situation where people are paying it. I don't think anyone like really, I don't think very many players actually were able to acquire oil that cheap. Maybe a few trades did happen. You know, it never really, I think for most people, got to the point where they were paid to take oil, but maybe some people did. Anyway, it is very different today. Oil just keeps going higher and higher.

We've talked to Goldman's Jeff Curry a couple of times about this idea of a commodity super cycle. And I don't know if we're like, how much longer it's gonna go, but we're definitely in an oil price boom right now.

Tracy Alloway (2:26)

Yeah, it definitely feels like it. But the weird thing is, so on the one hand, there is all this very, I guess, bullish action in terms of actual crude prices. A lot of people are talking about the possibility of another broader commodities super cycle.

But at the same time, if you start digging into the actual term structure of crude, it seems like people are expecting these high oil prices to go away relatively quickly. So much like the transitory inflation debate, that expectation that these high prices aren't gonna be with us forever is kind of baked into the futures curve of crude.

But again, just because we've had that conversation about inflation and whether or not it's transitory and it's certainly been more persistent than a lot of people have expected, it feels like there's just a question mark over the entire market at the moment. And it feels like it could go either way, right? We could get oil above $100 a barrel or we could see it start to go down as higher prices incentivize more production.

Joe Weisenthal (3:36)

Right, the whole, the capitalist dictum of the cure for higher prices is higher prices. But so far, higher prices have not cured higher prices.

Even with the surging prices, we haven't seen that big of a pickup in say US domestic production. It has gone up, but not like crazy.

And oil companies are making a ton of money right now, some at record highs in this sort of sweet spot where prices are really high, but they're not competing with each other to spend. Part of the story, as everyone knows, is that the sort of decade post-GFC was a huge time for US shale companies expanding like crazy. And then it turned out they lit it all on fire and it didn't actually turn into profits for investors. So there is a lot of a residual fear from that time, probably holding back production. But this is, I think, one of the key macro questions of our time, what's going to happen to the price of oil. So we're going to be talking about that today.