All-Stars #110 Dr. Anas Alhajji: Rebalancing the global oil market will take ~1 year

Episode Summary

Executive Summary: Eric Townsend’s final Macro Voices All-Stars episode features energy economist Anas Al-Haji arguing that the COVID-induced oil glut can be cleared within about a year, that shale’s near-term production will fall from underinvestment, and that a larger energy crisis could emerge in 2-15 years if the world underinvests in upstream oil while betting too heavily on EVs and renewables.

Main Topics: COVID-19 oil surplus and market rebalancing: Al-Haji argues the main challenge is eliminating excess inventory created by the pandemic, using OECD storage as the best proxy for surplus and framing OPEC+’s task as restoring equilibrium. OPEC+ capacity and historical precedent: He cites Saudi-led supply cuts in 2017 as evidence that inventories can be reduced materially, and says this cycle is even more favorable for balancing because several major producers are already down sharply. Shale shut-ins versus structural decline: He distinguishes between temporary well shut-ins and the deeper issue: collapsing investment, rig counts, and completions that will drive shale output lower for roughly two years before recovery. Demand resilience and recession dynamics: Al-Haji says demand fell far less than feared and that a recession without lockdowns would still support more activity than a lockdown scenario, improving the oil balance faster than many expect. Long-term energy narrative and underinvestment risk: He warns that public messaging about oil’s decline may cause producers to reduce upstream investment, setting up an energy shortage if EVs/renewables fail to scale as promised. Oil-to-materials strategy and future pricing: He suggests major exporters may offset falling crude demand by monetizing oil through petrochemicals and materials, which could sustain demand and push future prices higher. Strategic petroleum reserves and price ceilings: He argues that non-U.S. countries can use SPRs more flexibly than the U.S., limiting upside in oil prices in the near term before a later price spike becomes possible.

Key Arguments: The COVID-era oil surplus is best measured by storage, and the OECD alone holds about 180 million barrels of excess inventories. Saudi Arabia and OPEC+ have already shown they can rebalance the market, reducing inventories by 152 million barrels in 10 months during 2017. This cycle is easier than 2017 because major non-OPEC supply is much lower, including the U.S., Libya, Venezuela, Iran, and Iraq. The main shale problem is not shut-ins; it is the collapse in new investment, rig counts, and completions, which will force production down. Shale well shut-ins are largely reversible, but only about 25% of closed wells were being brought back at the time of the interview. Demand destruction was overstated; April demand decline was closer to 7-8 million barrels per day, not 20-30 million barrels per day. A recession without lockdowns still implies more mobility and therefore stronger oil demand than a lockdown scenario. Public claims that oil demand will decline may themselves cause underinvestment, creating a future supply shortage if alternatives do not scale. Oil producers may preserve demand by selling oil embedded in materials for EVs, wind turbines, and buildings rather than as crude. Non-U.S. strategic reserves can be used to suppress price spikes, making $100+ oil harder in the near term than many expect.

Data Points: OECD excess inventories: about 180 million barrels - Al-Haji says this is the best proxy for the current oil surplus 2017 inventory reduction: 152 million barrels - Saudi Arabia and allies reduced inventories over 10 months in 2017 2017 U.S. share of inventory reduction: 120 million barrels - Portion of the 2017 drawdown that occurred in the United States U.S. oil production change vs 2017: down at least 1.8 million barrels/day now vs up 1.2 million barrels/day then - Used to show why the current rebalancing is easier Difference versus prior period: about 3 million barrels/day - Derived comparison between 2017 and current U.S. production trend Libya production in 2017: almost 1 million barrels/day - Contrast with current much lower output Libya production now: 30,000-40,000 barrels/day - Illustrates major supply loss versus 2017 Venezuela production in 2017: 1.9 million barrels/day on average - Historical benchmark for supply comparison Venezuela production now: about 600,000 barrels/day - Shows a large decline in supply Demand decline in April: 7-8 million barrels/day - Al-Haji says actual decline was far less than 20-30 million feared Demand decline forecast by others: 20-30 million barrels/day - Referenced as an overestimate that proved wrong Shale wells reopened: about 25% of what was closed - Only a fraction of shut-ins had been brought back online U.S. production bottom: 9.8 to 10 million barrels/day - His expected trough for U.S. oil production Time to burn off storage surplus: within a year or less - Assuming current conditions persist Near-term shale decline duration: about 2 years - He expects production weakness from underinvestment to last this long Future energy crisis window: 2-3 years - He says a shorter-term crisis could occur from shale and investment declines Longer-term energy crisis window: 10-15 years - Risk if demand narrative and investment patterns create structural undercapacity

Pivotal Quotes: "When we talk about the current situation after COVID-19, we are talking about market equilibrium, what it takes to go back to equilibrium." — Anas Al-Haji: Defines the framework for analyzing the oil market reset "We are going to see a major decline in shale production as a result of that, not because of the shut-ins." — Anas Al-Haji: Explains why underinvestment matters more than temporary closures "If they keep hammering this message, everyone else is hearing it, and therefore, we are going to end up with one of two situations." — Anas Al-Haji: Warns that repeated claims of declining oil demand may trigger underinvestment or a future energy crisis

Implications: Near-term oil balances may normalize faster than expected, but chronic underinvestment in upstream supply could create a sharper oil shortage and price spike within a few years, with a larger structural crisis possible over 10-15 years.