Oil prices are in a kind of sweet spot in which producers are making healthy profits while consumers no longer have to cope with the stress of the highest oil and refined product prices in many years. Yet analysts and journalists are obsessed with the possibility of much higher prices if demand from China rebounds.

Is that out of concern for the public and investors, or do they crave stoking anxiety about the next potential blow to the global economy? It reminds me of the Y2K phenomenon in which tens of billions were spent anticipating a potential end to civilization that never materialized.

I like the Saudi oil minister’s take on a demand rebound in China:

“I will believe it when I see it.”
–Abdulaziz bin Salman

WTI is currently in the mid-$70s and Brent is just above $80 but Goldman Sachs expects Brent to average $105 in the second half of 2023.

“Right now, we’re still balanced to a surplus because China has still yet to fully rebound. Capacity is likely to become a problem later this year when demand outstrips supply. Are we going to run out of spare production capacity? Potentially by 2024 you start to have a serious problem.”
Jeff Currie, Goldman Sachs

In other words, the present looks just right—if a bit boring—but get ready for some largely speculative event to change all of that.

Goldman has consistently missed its price forecasts to the low side by at least 20% since June 2022. My point is not to criticize but to try to understand why analysts have been consistently wrong.

One explanation is that Goldman and most analysts are using an outdated paradigm for oil-market dynamics and price formation.

The State of the Market

The relationship of the WTI 200-, 100- and 50-day moving average curves does not lie. When markets are bullish, the 200-day average is on the bottom followed by the 100-day with the 50-day average on the top. The order of those curves have been inverted since November 2022 (Figure 1). The 50-day average was about $6 below the 50-day average on Friday, February 3.

Figure 1. WTI 200-, 100- and 50-day average curves have been inverted since November 2022. Source: CME, EIA & Labyrinth Consulting Services, Inc.

There’s nothing scientific about those exponential average curves but they faithfully reflect bullish and bearish trends. It takes time to form a new trend in which the 50-day average changes positions with the 100-day, and for the 100-day to change positions with the 200-day average curve. Until that shift occurs, we should listen to what the market is telling us instead of what analysts tell us might happen.

For example, IEA Executive Director Fatih Birol said recently, “If demand goes up very strongly, if the Chinese economy rebounds, then there will be a need, in my view, for the OPEC+ countries to look at their policies.” Those are some pretty big “ifs.”

Back in the real world, U.S. comparative inventory (C.I.) has increased +140 mmb (+97%) since late May (Figure 2). C.I. is now approaching the 5-year average and the implied market clearing price is $70 for WTI at current inventory levels. SPR releases ended three weeks ago but C.I. has increased in each of those weeks. No ifs about any of that.

Figure 2. Total comparative inventory has increased +140 mmb (+97%) since late May. C.I. is approaching the 5-year average and the implied market clearing price is $70 for WTI at current inventory levels. Source: EIA & Labyrinth Consulting Services, Inc.




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