With oil prices spiking nearly 10% from last Friday's sudden, capitulation "flash crash" which was perhaps driven by Pierre Andurand liquidating his entire long book, there has been a scramble by analysts to "fit" the narrative to the price action and the sudden change in momentum, most notably by Goldman, which continues to pump one after another bullish crude note, we suppose because Goldman's prop trading desk still has some oil left to sell to clients. Is the recent bounce an indication of a sustainable direction shift, facilitated by a another even more acute round of OPEC jawboning even as shale production continues to grow, or just a dead cat bounce? According to Bloomberg FX commentator Mark Cudmore, the answer is the latter as he explains in his latest overnight "macro view" note; Traders’ New Love for Oil Isn’t Basis for Marriage: Macro View.
# What a difference a week makes. Oil prices are more than 9% above last Friday’s capitulation low. The bounce has legs in the short-term but it doesn’t alter the long-term bearish story.
Recent newsflow justifies this rally. U.S. oil inventories just showed their largest drop of 2017, and a fifth consecutive weekly decline. OPEC is expected to extend production cuts when it meets May 25. Goldman reiterated its bullish call for an imminent supply deficit.
February’s record speculative long position has been roughly halved. The market technicals appear healthy and fresh for a sustained bounce.
That’s the short-term outlook. But at some point the much bigger picture will dominate again and that entails a far more negative skew on the situation.
As Bloomberg oil strategist Julian Lee wrote, the OPEC production cuts would need to be significantly deepened to remove the OECD stockpile by year-end, especially in the face of increased output from Libya and Nigeria.
OPEC itself just raised its forecast for 2017 production from non-members by 64%. U.S. Baker Hughes rig count has climbed for the past 16 weeks.
U.S. stockpiles may now be showing a steady decline – but only from an extreme record. They are still above any level seen before this year.
The important backdrop is that extraction from shale continues to become cheaper and more efficient all the time, lowering the price point above which production will rapidly increase to flood the market with supply.
*) Simultaneously, there’s the slow and steady growth of renewable/alternative sources of energy as well as technological improvements in energy storage and transfer. That’s without mentioning the C-words: carbon and climate change. Even without Trump’s support, efforts to reduce emissions and the use of oil-derived products are garnering more and more support.
All this boils down to a long-term, structurally bearish story. Rallies can last for weeks, or even months. But don’t get too attached. They won’t carry you through to old age.
*) Separately, here is Commerzbank doubling down on the bearish narrative with its own overnight note, it which it warns that should OPEC extend output curbs on May 25, it “is unlikely to be more successful than the cuts implemented so far in the longer term,” according to the bank's head of commodity research, Eugen Weinberg. He also points out, logically, that the extension may “considerably tighten the market in the second half, yet will only boost non-OPEC production."
The decisive factor, if only for the time being, technical positioning, as algos continue to enjoy stopping out whichever side is positioned more heavily in the oil price debate....