The collapse in oil prices has turned into a total bear bath. The market ignores the bullish fundamentals and only focuses on bearish things that are yet to come. The selling mania is going into its tenth day and is getting to be among the biggest consecutive down day slides since the 1980’s as the market that was totally worried about shortages a month ago are now pricing in a glut of supply. Even talk that OPEC is going to announce a production cut at its meeting on Sunday was not enough to bring buyers in and it’s clear that this selloff will have an impact on future oil output. Of course, the market does not care because it thinks that demand is going to sharply slow down. Either that or the market is trying to wash out everyone before they bring it back by the end of the year.
They hate oil in the front end of the oil curve but loving it more in the backend. While many see the new bear market as an ominous sign for the global economy, others see it as an opportunity. Big buyers of oil are not predicting lower prices for longer, but using this as a chance to lock in these price levels for years to come. Bloomberg News reported that “not every oil price is falling”. While the nearest Brent futures contract is down more than 4 percent this month, crude for delivery in late 2021 and 2022 has risen during the same period. The move has been spurred by consumers of oil — notably shippers and airlines — locking in their forward supplies as spot prices teeter on the brink of a bear market.
What this tells us is that despite the price crash in the front end and the predictions of slowing oil demand, even though we have not really seen that yet. While the market in the front end sees an adjustment mainly due to President Trump’s waivers to big buyers of Iranian oil and record U.S. oil output, in the big picture we still have a tight oil market, unless indeed we see that demand drop come quickly.
OPEC is talking a production cut and while the market does not care about that now, they will soon. Winter time fuel supplies are tight, and OPEC will cut when refiners really must ramp up. The bright side is that at least we may have some spare production capacity, something that we do not have now. On top of that, despite the U.S. waivers, it is still expected that eventually, we will see Iranian exports reduced by about 300,000 to one million barrels of oil a day.
