Why I’m Not an Oil Bear

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It’s easy to be an oil bear these days. WTI has fallen almost $20 per barrel since mid-September and OPEC+ seems to have lost its ability to do much about lower prices.

Many of the classic indicators are flashing red. WTI futures price is at its 200-week exponential average and that threshold signaled periods of much lower prices in 2014 and 2020 (Figure 1).

Figure 1. WTI futures price is at the 200-week exponential average. That threshold signaled periods of much lower prices in 2014 and 2020. Source:  CME, EIA & Labyrinth Consulting Services, Inc.  

Managed money has been in flight from oil since mid-2018 with a brief reversal after the record low prices early in the Pandemic. WTI net long positions fell -76% from late September through early December, and open interest has fallen -16% since early September (Figure 2). However, net long positions have rebounded 71% during the last two sessions.

Comparative inventory suggests that there is no geopolitical risk premium in WTI price. Figure 3 shows that the current week WTI average spot price of $73.52 is correctly priced (yellow circle) based on multi-year price-comparative inventory levels. That is more than a little curious considering the current shipping crisis in the Red Sea and increasing risk of conflict with Iran. I’m not predicting anything but the market’s present read on the situation seems likely to factor in more risk in the near term.

Figure 2. Current week WTI average spot price of $73.52 is correctly priced based on multi-year price-comparative inventory levels. Source:  EIA  & Labyrinth Consulting Services, Inc.

Meanwhile, OPEC projects more than a 2 million barrel per day (mmb/d) world oil supply-demand deficit for 2024. That seems aggressive but blending OPEC’s data with more conservative projections from the EIA still indicates a deficit of about 1 mmb/d in 2024 (Figure 3).

Figure 3. Blended OPEC-EIA data indicates -1.7 mmb/d supply-demand deficit in Q4 2023 and an average deficit of -1.1 mmb/d in 2024. Source:  OPEC, EIA & Labyrinth Consulting Services, Inc.

Figure 4 shows several orders of price-cycling within the overall arc of oil-price increase through June 2022, decrease to May 2023, the increase to September 2023, and more recent slide. These cycles represent what economist James K. Galbraith calls the choke-chain effect.

“Like the choke collar in a dog, the effect does not necessarily prevent economic growth. But as the consumption of energy resources accelerates, prices rise quickly and profitability drops rapidly. This lowers investment, sows doubts about the sustainability of growth and may also trigger a (perverted) tightening of other economic levers.”

Figure 4. The Choke-Chain Effect: cycling of prices and economic activity. Once scarcity is established & financialized, prices rise until consumer demand falls. Consumers adjust and prices rise again above marginal price. Source: CME & Labyrinth Consulting Services, Inc.                                 

The key to understanding oil prices since the world economy emerged from the Pandemic recession is that supply urgency is always the story playing in the background.

When investors look clearly at supply and the instability in the world, prices rise. When those fears fade slightly, and concerns about the global economy come to the forefront, prices fall.

I expect these choke-chain cycles to continue as the themes that I’ve described continue but my guess is that supply urgency and geopolitical risk will prove stronger in 2024 than fears about the economy no matter how well justified they are.

Art Berman is anything but your run-of-the-mill energy consultant. With a résumé boasting over 40 years as a petroleum geologist, he’s here to annihilate your preconceived notions and rearm you with unfiltered, data-backed takes on energy and its colossal role in the world's economic pulse. Learn more about Art here.

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