Bear Market Math

What part of a bear market don’t oil analysts understand?

WTI price has fallen -$42.38 (-35%) since June 2022 (Figure 1). It has fallen -$11.71 (-14%) since mid-April.

The analyst consensus seems to be that oil supply is tight and that demand is increasing strongly. Prices should, therefore, increase. The reason this isn’t happening is because the market is wrong.

But as Javier Blas recently explained,

“Purveyors of conventional wisdom would have you believe that the 25% drop in oil prices since late last year was due to softening demand in slowing economies. They — and you — would be wrong. The real problem is too much supply…Put simply, the black market for oil is booming. If one has the appetite – and the stomach – to buy crude from Moscow, Caracas or Tehran, the barrels are there. Better yet, they’re available at a discount.”

Javier Blas

This week, Bloomberg posted an analysis which concluded that oil supply was the overwhelmingly factor responsible for the $19 decrease in price since November (Figure 2).

“Oil prices have fallen by $19 since November. Our decomposition of the drivers shows supply was responsible for $21 of the decline in crude prices, while demand’s contribution was positive at $2. The source of extra supply is sanctioned countries like Iran, Russia and Venezuela.”

Fund managers seem to agree. WTI net long positions have decreased -66% since January 2018 and open interest has fallen -40% (Figure 3). Since June 2021, net longs have decreased -62% and open interest -25%.

Yet, most analysts cling to the belief that markets are tight and market sentiment is the problem.

“The oil market continues to be driven by external developments, rather than fundamentals.”

ING, May 18 2023

That’s bear-market math.