Ed Morse: Citigroup’s oil-market guru
Morse has made a habit of calling turns in the market. Derek Brower sat down with him in New York City
Citigroup's commodities research chief is taking a rare Friday afternoon to sit still and talk about oil and himself. “If you go back far enough, you’ll find that I was wrong a lot of times,” says Ed Morse.
We’re sitting in his office in Tribeca. Unemptied boxes clutter the shelves. A phone is squirrelled away in a desk drawer. The windows have a sheen of early winter Manhattan filth on them. It doesn’t really look like anyone works here. If you thought Wall Street’s most famous oil analyst would occupy a book-lined corner office with a view of the Hudson, think again.
Morse is a busy man. If he’s not on CNBC talking market moves, he’s probably on a plane. For one stretch of his career he was in a foreign country for 19 weeks straight, and back for each weekend. With oil markets in turmoil, the 73-year-old isn’t in a mood to slow down.
Morse’s stock has never been higher. Back in 2008, working for Lehman Brothers, he was one of the few analysts who called the crash in oil prices. At the end of 2013, he predicted another rough year was coming for commodities. He was right. Then, after oil prices had fallen steeply through the autumn, he and his Citi team said Opec wouldn’t cut at the group’s 27 November meeting. It didn’t, and prices plunged again. Investors who’ve relied on Morse’s direction in the past few years have been in good hands.
Not everyone is convinced. “There’s a bit of the stopped clock about him,” says a rival analyst, before allowing some grudging admiration. For some other analysts, access to the Saudis is the Holy Grail - and, they say pointedly, Morse, for some time denied a visa to the kingdom, lacks it. (He’s recently been invited back.) Then there are the peak oilists, a beleaguered bunch in these days of supply abundance. The Citi commodity team’s lengthy, data-rich notes on US production growth -- and its disruptive impact on market balances -- have made Morse their bête noire.
The bad news for them is that, if Morse is right, the collapse in oil prices will actually quicken the rise in US output in the first half of 2015. The drop in WTI, which was trading at around $45 a barrel in mid-January, will only spur drillers to concentrate on their highest-yield acreage and work through a backlog of uncompleted wells in a quest for cash flow. The rig count may fall, especially in the Bakken, Morse says. But production will rise as firms focus on the Permian basin, where more horizontal drilling will sharply improve recovery rates.
That’s not to say the situation will last indefinitely. Sub-$50 a barrel (/b) oil prices are unsustainable, Citi said in a recent note. At that price, US production growth over the year will probably be zero, says Morse. Venezuela and Russia would shed some output, too. All told, 0.7 million barrels a day (b/d) of global supply could be shut in. Alongside higher world GDP growth, pushing oil demand higher, prices should rally back towards $80/b by the end of 2015, he predicts.
Whether that would mark a victory for Saudi Arabia is debatable. Morse, though, is clear that the kingdom has fundamentally shifted its energy policy. The Saudis, he said, looked at the “two pillars of the market”, the US and China, and saw faltering demand from one and surging supply from the other - and realised they needed to do something.
“Saudi marketing problems went a long way in convincing them they had to change,” says Morse. “They are clawing back market share.” But allowing prices to drift lower, curbing shale oil output growth, wasn’t a purely economic decision, he believes. Depriving Russia and Iran of income was also a motivation. That it was Prince Abdulaziz, the normally silent assistant Saudi energy minister and son of the crown prince, who made a string of bearish comments early last autumn was significant, says Morse. “I smelled it the minute Abdulaziz made a set of statements in September,” he says. “I see a grand strategy.”
By his own admission, Morse didn’t call all of the oil-price meltdown right, which came earlier than he expected. Like most analysts, he missed the rapid deterioration of demand growth in 2014. Nor did he expect US light oil to push West African crude out of markets like eastern Canada’s as quickly as it did.
American crude exports could eventually reach far beyond Canada. In fact, rules allowing condensates to leave the country mean the US could be exporting 1m b/d by the end of this year, says Citi.
Morse has been arguing for a lifting of the ban for some time - he says he’s pleased to have helped shift the policy. Thanks to an earlier job in government and his work in the Obama transition team in 2008, he’s become a frequent adviser to the US government. The White House needed someone it could trust who knew how both the market and the politics worked. From January 2011 through to 2013, years of oil-supply volatility amid the Arab uprisings, Morse was on the phone daily to the White House.
He tells Petroleum Economist that his earlier period in working for the US government – he was deputy assistant secretary of state for international energy policy between 1979 and 1981, and the US representative to the International Energy Agency -- was a “heady” experience. But he’s not interested in going back.
Nor is he planning to back away from his Wall Street position. His career has also included stints as an academic, an oil firm executive and a publisher. Despite being at Lehman when the bank collapsed, he likes the culture of financial services. “You can see the whole chain of an industry much better in a big bank than you can in an oil company or government.”
As for retirement, he’s not interested. “I look at friends who retired before they were 60 and think they live a pathetic existence,” he says. He and his wife of nearly 50 years are “frenetic balletomanes”, so he times some business trips with the performance schedule. He cites that as evidence that he is slowing down -- though it’s hard to believe, given a seven-day working week that begins before dawn, ends at 11pm and almost always involves a flight somewhere. How does a septuagenarian cope with constant travel and so little sleep? “The germs are more important than the jetlag.”