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Daniel Ghali, a commodity strategist at TD Securities, analyzes the anatomy of a great rebalancing concluding that oil prices has the background to trade higher.

Key quotes

“We find that energy markets have already discounted easing supply-side support and we continue to expect significant deficits on the horizon nonetheless.”

“The future of energy prices will be driven by the shale patch. It is quite possible that shale production has peaked for the foreseeable future — the cost of capital for production has risen, potentially permanently so. Expected capital expenditures are still declining at a record clip. With budgets under pressure, the share of exploration spending in total investment may hit historic lows, while unconventional projects have less scope for further cost reductions. This creates a set-up in which energy prices could potentially trade significantly higher.”

“In a post-pandemic world, demand may well continue to recover while US supply growth could remain constrained. Nothing cures low prices like low prices.”