Maria Irene
In a recent discussion, Josh Young, Chief Investment Officer of Bison Interests, raised the possibility of a 1979-style oil crisis occurring this year as inventories collapse and underinvestment in the oil and gas sector creates an under-supplied market. Amid concerns about a global recession, the market faces strong demand, supply limitations, and a low elasticity of demand, which could lead to a demand destruction due to ultra-high prices.
Drawing parallels between the current market and the 1979 oil crisis, Young suggests that despite differences in their causes, both situations share similar supply-demand imbalances and inventory conditions. If the current trend continues, investors could find themselves positioning for a potential price spike, mirroring the pattern observed in the late 70s.
Young points to the recent announcement by OPEC of a voluntary production cut, which temporarily rallied oil prices. Although Russia’s history of not following through on production cuts might cast doubt on the efficacy of OPEC’s decision, the organization could be aiming to preemptively address market imbalances. This move, according to Young, would give OPEC greater control over the market and reduce price volatility to encourage investment.
The long-term demand trajectory for oil, coupled with rapid oil demand growth in China, could contribute to a potential price rise. While oil is currently a small percentage of the S&P 500 Index, a spike in oil prices could cause a broad stock market decline, with oil and gas equities rallying significantly.
As the stock market faces a potential shift in sector composition, Young cautions that policy mistakes could exacerbate supply and demand issues. He also argues that focusing solely on reducing oil supply might lead to dirtier alternatives, such as coal, and neglect the immediate needs of people who rely on oil for their daily lives.
In conclusion, Young’s discussion highlights the increasing likelihood of an oil crisis similar to that of 1979, as underinvestment and rising demand create a precarious market balance. This scenario could have far-reaching consequences for the global economy, stock markets, and energy policies.
Courtesy: Taken from a discussion between David Lin and Young
