While many are thinking that the sharp rise in the price of oil is an overnight sensation, the reality is that this is a bull market that has been years in the making. When the price of oil double bottomed near $26 a barrel in 2016, I predicted that it would be a generational low and that a new super cycle in oil was being born. At the time I said that I was in a very distinct minority, as the market mood and many analysts were saying that oil was destined to stay lower for longer. We heard predictions that we may never see oil above $30 or $40 ever again. Yet the arguments that I made, for what I called back then a generational low at that time seemed to be so far out of the mainstream thought, now is being accepted as some of the reasons oil today is at the highest level we have seen since December of 2014.
We warned that a historic cutback in capital investment, despite the glut, would leave the market short of supply despite the current oil glut. We predicted that OPEC would learn their lesson from their failed attempt to flood the market to bring shale oil produced to their knees and would cut production and comply with those cuts. We told you that the historically low oil prices would create a surge in global demand, despite what was the worst start to a stock market in January of 2016 in history. We compared the double bottom at $26 to the double bottom at near $10 in 1998 and 1999 that was forged in the depths of another Asian financial crisis.
Most importantly we warned about a real misunderstanding of the U.S. shale oil industry. We told you that the market was putting too much faith in shale oil as its production is light condensate that U.S. refiners can only take so much of. We warned about the logistical problems with shale that would lead to bottlenecks and raise costs and ultimately slow down shale production. We warned about the fast decline rate of shale wells and the realities of shale production on the ground when it comes to labor, infrastructure and capital investment. The Wall Street Journal now is asking “Is the U.S. Shale Boom Hitting a Bottleneck?”They report about congested pipelines, shortages of materials and workers and warn that it could stand in the way of Permian basin’s continued oil production growth. You have Bloomberg writing that U.S. refiners have hit a ‘shale wall’ not wanting as much light shale oil. Now add to that the rising specter of geopolitical risk against a tightening global supply in a robust global economy and there should be no real surprise why oil is on the rise.
