Where is oil headed? Most analysts flipped bearish following the Trump win with promises to “drill baby drill”. But how will tariffs factor in? Sanctions? War? Friday night concluded ZeroHedge’s first live-premium debate with energy analysts Josh Young of Bison Interests (The Bull) and Paul Sankey of Sankey Research (The Bear) who answered these questions and more.
Expertly moderated by “The Macro Tourist” Kevin Muir, we’ve compiled key moments below but encourage all readers to listen to the full debate (linked at the bottom).
The Bear Case:
As Mr. Sankey notes, "US refiners are running at very high levels of absolute throughput... but absolute levels of barrels going through the refineries seem to be really crushing margins." In essence, the challenge of high volumes but low profitability, especially during seasonal downturns.
He adds, "it's seasonally absolutely normal for this to be a very bad time of year because obviously people are not driving to the beach," pointing to the predictable lull in demand. Global overcapacity, particularly China’s modernized refining sector and the retirement of inefficient "teapot refineries," complicates the balance between capacity and demand. Sankey underscores that "the US hasn’t built a new refinery since the seventies," highlighting the long-term decline in domestic refining capacity.
Sankey goes on to argue that while demand is important, "the pricing principle is productivity of supply." When oil productivity falls, prices rise. In the 60s and 70s, "OPEC cutting supply... productivity fell and the price rocketed." When non-OPEC supply increased in the 80s and 90s, productivity rose, and prices fell. In the 2000s, China’s demand surged, but “you weren’t getting a supply response, and the price rose."
From 2012 onwards, U.S. oil productivity improvements put pressure on prices, as the U.S. added 10-13 million barrels per day of supply. Sankey points out that this "has been the problem for OPEC" as U.S. output has "eaten their lunch." The crucial turning point will be when U.S. productivity declines: "When the U.S. productivity begins to roll over... we’re looking for it." Sankey predicts that in two to three years, U.S. production will begin to struggle, which could shift his outlook: “When that turns to decline, then you buy them all.”
The Bull Case:
On the other side, Chinese demand remains strong, says Mr. Young who challenges a notion put forth by Sankey that we are likely to hit peak global demand. Young emphasizing that despite the growth of electric vehicles (EVs) and LNG-powered trucks, "they still represent the minority of vehicles that are produced in China and sold." Gasoline-powered vehicles continue to increase, and diesel remains dominant in China's truck fleet. Clear and ongoing demand for traditional fuels.
On Chinese refinery capacity, Young suggests that it reflects "revealed preferences" rather than just environmental initiatives. "I struggle to come up with a bearish oil narrative for China growing their refinery capacity significantly in the last few years."
Compounding strong demand is weak supply, particularly in nat gas, says Young.
"We're starting to see core gas producers come in and pay pretty high prices for assets that are nearly fully developed." Young reveals that liquored-up energy investment bankers confided in him earlier this week about their concerns of limited inventory, sharing that they "are close to out of these core inventory places."
Dark Horse Event To Change The Thesis
Muir closed by asking Young and Sankey what could change their oil outlooks. Young stated, “If there isn’t some sort of catastrophic tariff on China and there’s further stimulus in China, but Chinese demand materially disappoints and goes negative in 2025, I think that would make a very uncomfortable situation for an oil bull.”
Sankey focused on supply, emphasizing its outsized impact over the demand side of the price equation. He specifically noted the impact of U.S. shale production. U.S. shale has added 10-13 million barrels per day and if this productivity declines in the next two to three years, Sankey said, his bearish view will shift.
In short, the bulls should keep an eye out for weakness in Chinese demand. Bears should watch for declining U.S. shale production.
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