A Bear’s Guide To Oil Markets

Oil trades have not exactly shot the lights out this year, with the bulls getting kicked more times than a pigskin at the Super Bowl in a highly fickle market.

After a strong start to the year, oil prices have merely been treading water since late April following a perfect storm of unceasing trade tensions, lackluster demand growth and growing US commercial inventories that have dampened the outlook.

The outlook has improved somewhat over the past few weeks after the U.S. and China agreed to an interim trade deal, though niggling uncertainties coupled with ongoing supply worries appear to be capping gains.

Right now, the markets are approaching a key resistance area on the weekly charts with trade news causing volatile price swings.

As the two nations close in on a ‘phase one’ deal, the biggest bargaining chip that will determine whether the 16-month trade spat will ever be fully resolved, depends on whether Trump will agree to roll back some tariffs.

As things stand right now, it would be a stretch to say the oil market is nearly out of the woods.

There are some serious risks and overhangs that could still do plenty of damage even in the event that the two nations finally come to a compromise.

#1 US Shale Boom Continues

The one thing that’s giving the oil bear its loudest roar is the ongoing U.S. shale boom.

Ok, there’s been all this talk about the second shale boom circling the drain with the ongoing rig count collapse serving as a smoking gun. But here’s the rub with that idea: A third shale boom appears to be on the cards already.

Notably, OPEC is decidedly bearish about the future of the market citing US shale. In the cartel’s annual outlook report for 2019, it notes that oil accounts for 35 percent of global energy supply while also adding that OPEC supplies 35 percent of the world’s oil. OPEC says it expects the U.S. shale boom to continue full steam ahead, with our light tight oil accounting for the majority of new global production over the next five years.

It’s the figures that are shocking: OPEC has projected that U.S. tight oil output will balloon by another 5.3 million b/d and take the country’s production to 17.5 million b/d in the period ending 2030. Spread out evenly, that works out to an increase of 482,000 million b/d every year over the next 11 years. While not exactly earth-shattering, it’s still big enough to roil the markets, especially considering the weak demand growth projections for the next few years.

But it’s not just US shale that the bulls have to worry about. The New York Times has warned about a deluge of new supply coming from Canada, Norway, Brazil and Guyana.

#2 Iranian Sanctions Lifted

This is another huge supply overhang that may actually be deadlier than the US shale boom.

As we reported in a previous article, the EU is desperate to strike a new nuclear pact with Iran since it sees it as a key component of both regional and global security.

The Europeans have poured lots of cash into ensuring the nuclear deal stays afloat. They have even put up a safeguard to keep money flowing to Tehran, though it has hardly been very effective. The whole idea is to protect European companies doing business in Iran from Trump’s sanctions, though many remain wary of being shut out of the even more lucrative American market.

Trump’s maximum-pressure strategy has generated even greater regional instability in the Middle East and led to a loss of US credibility in Europe. However, POTUS has expressed optimism about striking a new Iran deal that was first mooted by British Prime Minister Boris Johnson.

A new deal would possibly mean lifting some sanctions and could mean more Iranian oil hitting the markets.

In June, Reuters reported that Iranian oil exports had dropped to just 100,000 b/d; that figure could quickly balloon to 2.5 million b/d if Trump decided to grant Tehran its wish.

Helima Croft of RBC Capital Markets has warned that a return of Iran to the oil markets could create a huge supply overhang and could see WTI prices drop as low as $50 per barrel.

#3 No China Deal

Last week, reports emerged that Washington and Beijing had agreed on an interim trade deal involving a phased rollback of tariffs. A day later, Trump backtracked and declared that he had not agreed to any tariff rollbacks.

It’s this kind of double-speak that makes you question how genuine either sides is at making any sort of comprehensive deal.

Indeed, Wall Street sees gloomy prospects of anything beyond a Phase One deal happening anytime soon, and has warned that something more solid will be required for market sentiment to improve definitively.

According to the Institute of International Finance, the trade war has led to a “synchronised economic slowdown,” including falling imports. A nebulous trade pact just won’t cut it as far as repairing the damage goes.

#4 Weak Global Economy

The stream of bearish projections by OPEC seems to be eternal.

The 14-member organization now says it expects demand for its oil to be weaker-than-expected, which bodes really badly for a market that’s going to see more of the commodity coming in in a few short years.

OPEC sees oil demand clocking in at a mere 32.8 million barrels per day (mb/d) by 2024, substantially lower than the 35 mb/d it had projected last year.

The long-term outlook is a bit brighter, with OPEC projecting demand growth of 12 mb/d over the next two decades

OPEC has been wrong in the past, and oil bulls can only hope that this is again the case this time around.

It’s not peak oil anymore. It’s peak oil demand.

Even the much-awaiting IPO prospectus for Saudi Aramco is flagging peak oil demand risk within 20 years. Just a short while ago, Saudi Arabia was dismissing any idea of peak oil demand as highly exaggerated.

The Bears Have It Made

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Source: WTI Oil Chart by TradingView

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Source: Brent Crude Oil Chart by TradingView

Nymex crude oil prices are firmer today and trading around $57/barrel, but there’s a lot raining on that parade.

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Not only do we have the U.S.-China trade war, but rising tensions amid protests in Hong Kong are weighing down on this. Hong Kong will absolutely affect a U.S.-China trade deal in one way or another.

And then, overnight, Federal Reserve Vice-Chairman Richard Clarida noted that very low global inflation levels are presenting problems for the world’s major central banks. In other words, it’s hindering their ability to stimulate economic growth.

This comes with another nod to U.S. shale by a U.S. Energy Department official who highlighted that U.S. shale oil production will reach 13 million barrels per day next month.

So, a lot of news expected even later today to further bolster the bearish stance on oil, including more U.S. economic data.


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