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Page added on November 9, 2018

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Oil’s in a Bear Market Again

Business

Crude oil prices fell into bear-market territory, as prices fell more than 1% in Thursday trading. Crude has been weighed down by signs of eroding global economic growth, wilting demand and even the U.S.’s decision to offer waivers on sanctions of Iran.

Brent crude dropped 2% to $70.65 a barrel on Thursday, while West Texas Intermediate, or WTI, front month crude futures slid 1.6% to $60.67 a barrel. That put WTI down 20.6% from its Oct. 3 high, officially meeting the definition of a bear market.

United States Oil Fund (USO), which tracks West Texas Intermediate futures, had fallen 0.7%, while the Energy Select Sector SPDR ETF (XLE) had slipped 0.9%. Instinet technical analyst Frank Cappelleri observed that the last time crude experienced a 20% peak-to-trough correction was in 2017, but it took crude nearly six months to accomplish that feat. This most recent downward spiral has taken five weeks.

But a short-term pop to $80 per barrel crude could be coming, say oil experts. Iranian exports will continue to decline gradually and emerging markets will restock their inventories, says Goldman Sachs’ commodity analyst Michael Hinds in a report published Wednesday. “We believe Brent prices are oversold as fundamentals still point to a market deficit in 4Q18,” Hinds writes. RBC Capital Markets’ oil analyst Michael Tran echoed that view in a report published last week reiterating his view that Brent trends back to the $80 per barrel range before the year’s end.

Analysts continue to believe that oil’s slide is a case of bad timing. The Trump administration pushed governments to reduce Iranian oil imports to zero with related sanctions. That initially helped keep crude oil prices at multiyear highs, but as Washington granted waivers to the biggest buyers including China, India, and South Korea, investors turned sour on light and sweet.

Yet, much of Iran’s oil exports are “still unsustainable,” says Goldman’s Hinds. The waivers, he notes, are temporary and growth in demand is “likely underestimated.” Demand in the biggest markets U.S., China, Europe, and India says Hinds “remains resilient.”

An estimated 1.3 million-to-1.7 million barrels a day of Iranian exports could come off the market by the first quarter of next year and “that could climb” over the next round of discussions expected in six months, says Helima Croft, global head of commodity strategy at RBC Capital Markets.

Hinds sees a short-term rally in reaction to a supply deficit in the fourth quarter, but a more significant, sustained boost in oil prices, he says, will require longer-term supply disruption to markets. Perhaps that will come from Libya and Nigeria, which are heading into elections that could lead to sustained periods of instability, further disrupting oil supplies.

While the outcomes of those elections are uncertain, accelerating production in the Permian, an oil-rich area in the U.S., could weigh on Brent prices as soon as next year. Hinds says that production bump won’t necessarily translate into inventory builds, but could push crude oil prices down to $65 per barrel crude by the end of 2019.

That means a short-term rally, if it materializes, could be last-call for oil bulls.

BARRONS



17 Comments on "Oil’s in a Bear Market Again"

  1. Antius on Fri, 9th Nov 2018 8:46 am 

    WTI drops beneath $60/bl.

    https://www.zerohedge.com/news/2018-11-09/crude-testing-critical-support-will-stocks-jobs-follow

    Commodity price deflation, especially oil and copper, are ominous signs of recession.

    https://www.macrotrends.net/1476/copper-prices-historical-chart-data

    It would appear that real prosperity has not grown for 10 years. Any gains in China have been matched by losses elsewhere.

  2. I AM THE MOB on Fri, 9th Nov 2018 8:53 am 

    There will be an oil shortage in the 2020’s, Goldman Sachs says

    https://www.cnbc.com/2018/11/09/goldman-sachs-there-will-be-an-oil-shortage-in-the-2020s.html

  3. rockman on Fri, 9th Nov 2018 10:07 am 

    “That put WTI down 20.6% from its Oct. 3 high…” Another great opportunity to point out the “intelligence” of the “oil market”. On 3 Oct some of the market bet hundreds of $millions (if not $billions) that oil futures would be trading for 20% higher in 30 days. And now one month later they have lost their collective asses. LOL.

    Think back to just a month ago about all the stories we saw from the experts who used those high 30-day FUTURE CONTRACTS to pontificate what this meant for the future of the oil consumers. All of which has been now proven to be pure bullshit. The 30-day futures closing price HAS NOTHING to do with the future price of oil. It is only an indication of what SOME investors think oil future contracts will be selling for in one month. Of course there are future contract buyers who are betting they are wrong. Folks who have now made countless $millions by taking that bet made by those “experts”. And now we’ll get to hear from many of those “experts” (who had much to say about those formerly high contract prices…including some of our cohorts here) about what the current much lower future contract prices mean about the future of oil consumers.

    I’m sure they’ll get it right this time. LOL. This November Rockman is not selling his oil for the higher closing price of 3 Oct. Nor is he selling it for the current much lower futures contract price. His price will be based on a more complex calculation which uses (only in part) the average closing contract for the entire month August or September depending on which long term sales contract a particular oil is priced under. And the vast majority of oil sold by producers globally is also priced under similar long term sales contracts.

    But also understand that much of that oil IS NOT sold by producers to refineries…it is sold to oil marketing companies. Companies who then sell to refineries under a completely different set of contract bases.

    But none of those facts will stop the armchair experts from explaining exactly what the 9 November closing price of 30-day future contract prices really mean to the future of global oil consumers.

    Of course we’ll have to wait until the second week of December to know what their view of the future for oil consumers will be at that time.

  4. Twocats on Fri, 9th Nov 2018 10:20 am 

    Oil companies must keep investing, and paying off those $55 hedges that were so critical a year ago, and paying higher wages for a shrinking labor pool (of people willing to work in Midland and sleep in a tent), and don’t forget stock buybacks, all while oil is dropping.

    I’d love to be listening in on those board meetings.

  5. Duncan Idaho on Fri, 9th Nov 2018 10:41 am 

    “Of course we’ll have to wait until the second week of December to know what their view of the future for oil consumers will be at that time.”

    I’ll be waiting—

  6. Cloggie on Fri, 9th Nov 2018 11:01 am 

    Commodity price deflation, especially oil and copper, are ominous signs of recession.

    Or oversupply.

    The entire world economy is growing, albeit with different speeds:

    https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

  7. Chrome Mags on Fri, 9th Nov 2018 2:10 pm 

    https://www.cnbc.com/2018/11/07/trump-on-falling-oil-prices-thats-because-of-me.html

    Trump on falling oil prices: ‘That’s because of me’

    “I gave some countries a break on the oil,” Trump said during a lengthy, wide-ranging press conference the day after Republicans lost control of the House of Representatives in the midterm elections. “I did it a little bit because they really asked for some help, but I really did it because I don’t want to drive oil prices up to $100 a barrel or $150 a barrel, because I’m driving them down.”

    “If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.”

    So based on Trump’s quoted statements, oil price dropped because he doesn’t like OPEC. I don’t follow that logic but maybe someone else here can parse those words to make better sense.

    OPEC is not a monopoly, if it was it would hold all the worlds oil. Maybe he doesn’t understand that.

  8. Davy on Fri, 9th Nov 2018 6:46 pm 

    “A Chinese Recession Is Inevitable” – Ken Rogoff Ruins ‘Decoupled-America’ Narrative”
    https://tinyurl.com/y96khbo4

    “When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question. Typical estimates, for example those embodied in the International Monetary Fund’s assessments of country risk, suggest an economic slowdown in China will hurt everyone. But the acute pain, according to the IMF, will be more regionally concentrated and confined than would be the case for a deep recession in the United States. Unfortunately, this might be wishful thinking. First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest.”

    “a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy. As bad as a slowdown in exports to China would be for many countries, a significant rise in global interest rates would be much worse.”

    “A recession in China, amplified by a financial crisis, would constitute the third leg of the debt super-cycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.”

  9. Davy on Fri, 9th Nov 2018 8:02 pm 

    Trump is bringing down the U.S. ZOG, aka The Swamp.
    We all should’ve voted for Hillary. Hindsight is 20-20.

    Oh well, it was fun while it lasted.

  10. Davy on Fri, 9th Nov 2018 8:03 pm 

    DIRTY JUAN IDENTITY THEFT

  11. rockman on Sat, 10th Nov 2018 2:18 pm 

    Duncan – “I’ll be waiting”. Waiting or bought some oil futures and waiting to see how much you made or lost? LOL.

    I don’t track the historic month to month changes in the 30-day contracts but I suspect this was the largest win/loss in a long time. But there was a 14% monthly increase from August to Sept 2016. And a comparable drop in early summer 2015. See chart:

    https://www.investing.com/commodities/crude-oil-streaming-chart

    Up or down either way a lot of money changed hands.

  12. rockman on Sat, 10th Nov 2018 2:48 pm 

    Cloggie – “…are ominous signs of recession…Or oversupply.”

    So by your analysis the world went into recession and/or over supply in May of this year to a recovery and/or undersupply in June and then back into recession and/or oversupply in June and then back into recovery and/or undersupply in July and then back into recession and/or oversupply a month or so later. And then periodically went into minor recessions and/or oversupply and back again to small recoveries and/or undersupplies for a number on months until finally slipping into a major recession and/or oversupply in October.

    Do you really think such calls on the economic condition of the economy and energy supplies based upon oil futures is the correct approach? See the chart for just the last 6 months:

    https://www.investing.com/commodities/crude-oil-streaming-chart

  13. Cloggie on Sat, 10th Nov 2018 3:18 pm 

    “So by your analysis the world went into recession and/or over supply in May of this year to a recovery and/or undersupply in June and then back into recession and/or oversupply in June and then back into recovery and/or undersupply in July and then back into recession and/or oversupply a month or so later.”

    No. Antius was talking about “ominous signs of recession”

    According to me the world is not in a recession. If oil prices drop it means there is increasing oil in supply.

    “Oversupply” if you will.

  14. Anonymous on Sat, 10th Nov 2018 6:37 pm 

    The futures price of oil is just the “betting line”. In reality, future prices can be very hard to predict, because small differences in supply/demand can drive the market. And there are many factors that can change them. This does not mean that futures prices are useless. Just that they are not certain.

    Futures price is somewhat similar to sports bookie odds. Just because individual games may differ dramatically from the line, does not mean the line has no insight. It is still the best guess. Just one with uncertainty bands around it.

    A really good graphic to help explain this is the EIA confidence interval:

    https://www.eia.gov/outlooks/steo/marketreview/pdf/uncertainty_past_wti.pdf

    Note: that you can actually buy SPECIFIC PRICE options. IOW, if you want, you can bet on oil being above $100 a year from now, rather than just buying the DEC19 contract (currently at $61.40). Because you are speculating on something with significantly worse odds, you will be given better odds

    When you buy an option like the $100 call, it is just like putting your money on a long shot at the track. When you do this, it does NOT mean that you think this is the most likely outcome. Just that there is a more than 5% chance (if you are betting on a 20-1 horse).

    However, it also means that you (and the market overall) thinks there is SOME possibility of it happening. So when the long shot pays off occasionally this does not mean the odds book is bunk or that longshots always win. Just that sometimes you do.

    So…this whole oil price wasn’t exactly what futures predicted is silly. Get your CFO to explain it to you. Or better yet, talk to a bookie. 😉

  15. Anonymous on Sat, 10th Nov 2018 7:41 pm 

    Last month, US production went up by over 400,000 bopd. Notably the Permian grew strongly despite supposed bottlenecks on crude pipelines (operators are trucking oil to Wichita Falls, TX, where there is still some capacity for injections).

    Currently the US is doing 11.3 MM bopd. That is 2.1 MM bopd more than it did a year ago. (AUG17 to AUG18 data). Just our yearly growth was more than the entire production of Mexico!

    I suspect the massive recent increase in US production, 31OCT report, may have shook the markets which were relying on a slowdown in US growth, not an acceleration. (Also the Iran sanctions weakening, China demand, blabla.)

    Currently the following states are producing record amounts of oil:

    TX: 4.5 MM bpd. Equivalent to Iraq or Canada. Puts it at the number 4 “country” (if you give it the nod over these two), behind SA, RU, and US.

    GOM: 1.9 MM bpd. (Recall all the articles saying GOM was going down and that EIA was crazy with growth projections, “where will it come from”. Well look at the score board. Record.)

    ND: 1.3 MM bpd. So much for the Bakken is over.

    NM: 0.7 MM bpd. Stunning increases. Almost 0.3 MM bpd increase in a year. It is not crazy to think of NM joining the “million plus” clique of TX/GOM/ND in a couple years. NM is already making more than Qatar or India. And in a year, it will probably be doing more than the UK. And that is a little state sort of attached to West TX!

    CO: Doing 0.5 MM bpd. As recently as 2011, it was doing under 0.1.

    ———–

    Basically the oil markets have to drop price to constrain US production. 2 million bpd increases just from the US alone are not sustainable. Something has to give and that is price. When prices drop, shale slows down. Therefore, prices drop.

  16. Outcast_Searcher on Sun, 11th Nov 2018 10:40 am 

    Whether the price of crude is rising or falling in recent weeks, doomers will proclaim it’s bad, it implies economic doom, etc. Even with normal price fluctuations for a highly volatle commodity. LOL

    Kind of like with the dollar. Whether the dollar rises, falls, or is relatively flat, the doomers frequently proclaim that some horrible fate awaits the economy (US or global), due to the price of the dollar. Even for perfectly normal fluctuations of a currency that moves around in a fairly broad range, over time.

    But of course, this time — THIS TIME, the Cassandras are right. Sure.

  17. I AM THE MOB on Sun, 11th Nov 2018 10:48 am 

    Outcast_

    There will be an oil shortage in the 2020’s, Goldman Sachs says
    https://www.cnbc.com/2018/11/09/goldman-sachs-there-will-be-an-oil-shortage-in-the-2020s.html

    German Military (leaked) Peak Oil study: oil is used in the production of 95% of all industrial goods, so a shortage of oil would collapse the world economy & world governments
    https://www.scribd.com/document/387459134/german

    Imminent peak oil could burst US, global economic bubble – study
    https://www.theguardian.com/environment/earth-insight/2013/nov/19/peak-oil-economicgrowth

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