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With the OPEC price war behind us, headlines have been focused on decreased global oil demand, the current lack of storage available, and market factors that led to negative WTI prices. While these have been important developments in the short term, sophisticated investors are taking advantage of the volatility and positioning their portfolios for long-term gains.
As we illustrate in this commentary, when demand starts to recover, it will be impossible for producers to restart production fast enough to keep inventories from drawing down sharply. In our past letters, we have discussed many of the problems embedded in the global oil supply base, from the shales to aging non-OPEC fields outside of the US. Each of these issues will immediately come to the fore once demand recovers and supply is unable to arrest its embedded decline. There is a strong likelihood that oil prices experience an extremely violent move higher sometime in the next eighteen months if not even sooner.
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