Commodities research house of the year: Macquarie

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Vikas Dwivedi, Macquarie Group

The willingness of Macquarie’s commodities strategists to take contrarian positions – based on deep analysis, fundamental research and extensive industry experience – has endeared them to clients. But it can be a nerve-wracking business, says Vikas Dwivedi, Houston-based global energy strategist at Macquarie Group, winner of this year’s Energy Risk Commodities research house of the year award.

“You don’t want to be on the wall of shame for making a bold prediction that turns out to be wrong,” he says.

The specific research that Dwivedi has in mind here is related to the gasoil crack reaching a record high of $35 per barrel in March 2022, on the back of sky-high natural gas prices at the Netherlands-based TTF gas hub.

“We built a hydrocracker model, from the roots of the refinery up. It found that, even though the margin was at a record high, it was still cheap,” he says.

Rather than take profits and wait for the margin to collapse, “the better trade was to hold your nerve and buy”, he explains.

Macquarie’s analysis found that, despite the wide spread, refineries were still losing money producing diesel and gasoil because the cost of natural gas was so high. “Getting long at a record high was still the better risk-reward trade,” he says. “That model got a lot of attention.”

Macquarie’s team of 12 analysts, in China, India, the UK and US, not only brings together considerable energy sector experience, but also allows for “a massive investment in data gathering”. Dwivedi says that one of his team spends almost all of his time tracking oil production, particularly in the US. “That’s been very helpful to us.”

This bottom-up analysis helped inform one of Macquarie’s more eye-catching calls – that the world is not about to enter a commodity super-cycle partly driven by underinvestment in upstream oil and gas. “Hitting that head on has been challenging, because that view has become ingrained.”

Unlike many market-watchers, Dwivedi believes investment in new production has been sufficient to avoid a supply crunch in the coming years. While upstream spending is considerably lower than in previous years – at around $480 billion in 2023, compared with an average of $540 billion per annum from 2013–19 – “the efficiency of capital is so much greater because the upstream has had to live on less … When you couldn’t rely on $100/barrel oil, everybody had to go back to the gym and come back leaner.”

In addition, while he agrees with the supercycle advocates that there has been underinvestment in exploration, he suggests that “we have a long runway to live off”, a legacy of overinvestment in the 2010s. “We don’t think that will be exhausted for seven to 10 years. Eventually, the supercycle view will probably be correct, but by that time oil demand may be decelerating rapidly.”

Here, too, Macquarie is out of step with the market consensus. While Macquarie is active in financing energy transition and renewable technologies, its strategists are not forecasting a peak in oil demand until 2040 – 15 years later than the International Energy Agency’s forecast, some 10 years behind majors such as BP and TotalEnergies, and more in line with ExxonMobil’s prediction.

While Dwivedi sees demand for gasoline peaking in the next few years, and bunker fuel demand heading to zero by 2028, other parts of the energy complex are set for strong growth over the coming decades, he believes. For example, only one-fifth of the world’s population has ever flown – and hundreds of millions of Chinese, Indians and Africans will become wealthy enough to do so in the years to come. He anticipates strong growth in liquefied petroleum gas and naphtha “because of the continuous construction of buildings, offices, new home starts, auto sales – all these things require an enormous amount of plastic”.

As well as finding insights from crunching numbers and building models, Dwivedi remains committed to more traditional approaches: “The best information we get is from getting on a plane and meeting people.” Conversations at dinners across India and China last year revealed a whole ecosystem of newly created, well-capitalised trading companies hoovering up Russian oil.

These discussions, together with signals from policy-makers, helped reinforce Macquarie’s bearish view. “It’s not in the interest of the US and other countries to have additional global inflationary pressure … [Global supply] might get a little choppy, but that oil was going to reach the market,” Dwivedi says. “It really helped us stay with our bearish call when oil was rallying.”