MacroVoices #268 Art Berman: Crude Oil Update

Episode Summary

Executive Summary: Macro Voices episode 268 centers on a crude oil special with geologist Art Berman, who says U.S. production should roll over later in 2021 due to low rig counts, but he does not expect oil to surge far beyond $70 because OPEC’s spare capacity and market structure limit upside. The post-game contrasts this with a more bullish secular-inflation view and reviews energy charts across oil, gasoline, nat gas, and energy equities.

Main Topics: Art Berman's oil outlook (Priority: 5/5): Berman argues U.S. crude output is vulnerable to a later-2021 decline because drilling activity remains far below what is needed to sustain current production. Why crude may top near $70 (Priority: 5/5): Despite supply concerns, Berman says OPEC spare capacity is so large that the market has little reason to price oil far above current levels. Demand recovery and transport fuels (Priority: 4/5): Berman challenges forecasts of record demand, emphasizing incomplete recovery in aviation and transport fuels relative to pre-pandemic levels. Comparative inventory and price formation (Priority: 4/5): He uses comparative inventory charts to argue that the market remains on a low-supply-urgency curve that supports prices around the current range rather than a major breakout. Energy transition and long-term energy density (Priority: 4/5): Berman warns that rapid electrification and renewables expansion may reduce economic productivity because oil’s energy density is hard to replace. Energy market technicals and equities (Priority: 3/5): Patrick reviews oil, gasoline, nat gas, crack spreads, and energy stock ETFs, highlighting deeper pullbacks in E&P and services versus relatively resilient midstream names.

Key Arguments: Berman maintains that U.S. oil-directed rig counts are too low to sustain current production, implying a significant decline later in 2021. He argues price upside is capped because OPEC has roughly 8.5 million barrels/day of spare capacity, so the market does not perceive an immediate shortage. He says price increases beyond the level needed to make a profit do not necessarily create more drilling because activity faces mechanical and capital constraints. He disputes claims that oil demand will hit record highs by Q3 2021, pointing to still-incomplete recovery in jet fuel and transport fuel demand. He frames the energy transition as a physics and productivity issue: lower energy density implies lower economic output unless the world accepts reduced growth. Eric counters that secular inflation and broad commodity repricing may be the real driver, making a bigger oil move plausible even if fundamentals alone suggest moderation.

Data Points: Episode number: 268 - Macro Voices episode identifier Recording date: April 22, 2021 - When the episode was recorded WTI oil price at recording: about $63.40 - Referenced in the post-game market discussion Art Berman prior forecast: $65 crude oil in 2021 - Call made on the January appearance that was reached early Likely 2021 WTI high per Berman: around $70 - Berman’s updated upside target U.S. oil-directed rig count: 323 rigs (March) - Used by Berman to argue drilling is insufficient Historical rig count needed for 11 mb/d: 800–900 rigs - Berman’s back-of-the-envelope supply argument U.S. production: holding near 11 million barrels/day - Current production level cited during the interview U.S. production decline forecast: about 1 to 1.5 million barrels/day - Berman’s expected later-year drop versus consensus OPEC spare capacity: 8.5 million barrels/day - Central reason Berman thinks price upside is capped Lowest historical OPEC spare capacity mentioned: 0.8 million barrels/day - Context for prior price spikes WTI average during 2016–2019 shortage period: $54 - Used by Berman as a reference level for price formation Dallas Fed break-even survey: $52 per barrel - Approximate price U.S. oil companies said they need to make money 10-year Treasury yield: about 1.56% - Market backdrop discussed in the opening wrap 10-year Treasury yield peak mentioned: almost 1.8% - Earlier 2021 yield run-up referenced Oil inventories: down 594,000 barrels - Weekly EIA-style inventory data cited in the wrap Cushing inventory change: down 1.3 million barrels - Weekly storage movement cited in the wrap Gasoline inventories: up 86,000 barrels - Weekly product data cited in the wrap Distillate inventories: down 1.1 million barrels - Weekly product data cited in the wrap Transport fuels recovery: 84% - Berman’s measure for jet, gasoline, and diesel versus normal Gasoline and diesel recovery: 89% - Berman’s measure excluding jet fuel Comparative inventory outlook: $70 WTI if market stays on the current blue curve - Berman’s chart-based price framework Energy sector data point: XOP pulled back from $92 to $72 - Patrick’s chart deck on E&P equities Oil services ETF trend: approaching 200-day moving average - Used to show deeper weakness in service stocks

Pivotal Quotes: "I think we have an Austrian crackup boom in process. And I think that markets are likely to continue melting up higher." — Eric Townsend: Opening market wrap on equities and macro backdrop "I just can't shake it. It feels to me like this wasn't painful enough for us oil bulls." — Eric Townsend: Commentary on crude’s pullback and the likelihood of another dip "I don't see any reason based on where we are ... to get us higher." — Art Berman: Berman’s core view that crude is near fair value and upside is limited

Implications: Berman’s framework suggests oil may stay range-bound near current levels even if U.S. output weakens, while commodity investors should watch inflation and OPEC discipline. Longer term, the energy transition could mean tighter fuel markets and lower growth rather than abundant cheap energy.