Oil Price Cycles - Dec 17
Posted: Tue Dec 17, 2019 12:06 pm
In my December 14th podcasts I point out that.
> ALL oil price cycles end.
> They start and end when you least expect it.
> They always over-shoot the mark.
If you stop the podcast on slide 4 (a 30 year chart of oil prices), you will see that this price cycle actually bottomed in Q1 2016.
> It hasn't felt like it, primarily because of the extended bear market in upstream companies share prices.
> The media continues to grossly over use the word "glut".
> FEAR of the global recession with lower demand for oil has cause wild oil price swings during the rebound phase.
> IMO the "Right Price" for WTI is $65-$75, with $65 being the level justified by supply/demand fundamentals and $75 the level appropriate considering the geopolitical risk in the Middle East.
John Kemp is a very smart guy that writes opinion pieces for Reuters. He lives in London where the "gloom & doom" is even worse than it is here. We are all impacted by our environment and I believe John's views on oil prices are more bearish than mine because the Brexit noise in the UK. If John's articles turn bullish on oil, then maybe the oil traders are also turning bullish. Here is what John Kemp wrote this morning. BTW I do email John from time to time, but he never response.
COLUMN-Oil prices rise on optimism about economy in 2020:
17-Dec-2019 14:42:16
John Kemp is a Reuters market analyst. The views expressed are his own
Chartbook: https://tmsnrt.rs/2PSMGgW
By John Kemp
LONDON, Dec 17 (Reuters) - Crude oil traders have become progressively more bullish about the outlook for prices since the beginning of October as the trade war between the United States and China has eased, lifting concerns about a global recession.
Deeper production cuts by Saudi Arabia and its allies in the expanded OPEC+ group of oil exporters, announced at the start of this month, have probably accelerated the bullish shift.
But production cuts are a second-order effect. The rise in oil prices has been primarily driven by greater optimism about the outlook for global trade and the economy next year
Manufacturing surveys and data on industrial production in the United States, China, India and Germany have all started to show tentative signs that the recent slowdown in global growth and trade may be bottoming out.
In the United States, the Federal Reserve has cut interest rates three times by a total of 75 basis points since the middle of the year in a bid to extend the current expansion.
In China and India, governments have announced stimulus packages and encouraged increased bank lending to revive their economies. Even Germany has started to discuss using fiscal policy to stimulate more growth.
As it enters a re-election year, the Trump administration’s focus is shifting from trade war to stimulating the economy, accelerating growth and boosting jobs and wages.
With so much fiscal and monetary stimulus around the world, and the electoral cycle entering a strongly pro-growth phase, crude traders are betting oil consumption will grow faster next year.
LOADING UP
Hedge funds and other money managers have purchased crude futures and options equivalent to almost 320 million barrels since Oct. 15 (“Oil traders bet on economic upswing in 2020”, Reuters, Nov. 22)
Buying started long before OPEC+ announced its decision to deepen production cuts at the start of this month and instead coincided with the rise in U.S. equity prices.
The timing strongly suggests rising oil prices are primarily tied to an improving consumption outlook rather than expectations about production cuts.
As a result, oil prices have continued to rise despite scepticism about whether OPEC+ will actually remove extra crude from the market next year.
Front-month Brent futures prices have increased by more than 13% ($7.50 per barrel) from their recent lows in early October. In the same interval, the broad-based U.S. S&P 500 equity index has risen almost 10%.
Brent’s six-month backwardation, which is probably a more accurate measure of expected market tightness, has risen to $3.60 per barrel from $2.00.
Rising crude futures prices are a gamble the global economy will continue expanding, probably at a faster rate, through 2020.
Oil consumption growth is now heavily geared towards emerging markets, especially China and India. Rising oil prices are a bet that one or both will experience a cyclical upswing next year (“India’s economic recovery critical for oil in 2020”, Reuters, Dec. 11).
REVISITING 1999
If traders’ expectations prove correct, continued and accelerating consumption growth, meeting continued production restraint by Saudi Arabia and the rest of OPEC+, could create conditions for a cyclical increase in oil prices similar to 1999/2000. < Go back and take a hard look at slide 4 of my Dec. 14 podcast. From 2000 to 2008 the oil price increased over 400%.
In the late 1990s, global economic growth accelerated after the Federal Reserve cut interest rates three times by 75 basis points in 1998 in the wake of the Asian financial crisis and Russia’s debt default, while OPEC continued to restrain production until well into 2000, causing the physical market to tighten sharply.
The result was a sharp backwardation and a surge in oil prices through 1999 and into the first quarter of 2000 (“Oil and equities prepare to party like it’s 1999”, Reuters, March 19, 2019).
Expectations for the same conditions drove prices sharply higher in the first four months of 2019; traders are betting again on the same outcome in 2020.
If prices rise too rapidly, Saudi Arabia will come under pressure from the White House to restrain them by boosting production.
Brent prices above $75 risk provoking a response from the U.S. president on Twitter, just as they did in 2018 (“Oil prices are re-entering the Tweet zone”, Reuters, Sept. 13, 2018).
In the meantime, however, traders are betting that prices have some room to rise before they draw a political response.
> ALL oil price cycles end.
> They start and end when you least expect it.
> They always over-shoot the mark.
If you stop the podcast on slide 4 (a 30 year chart of oil prices), you will see that this price cycle actually bottomed in Q1 2016.
> It hasn't felt like it, primarily because of the extended bear market in upstream companies share prices.
> The media continues to grossly over use the word "glut".
> FEAR of the global recession with lower demand for oil has cause wild oil price swings during the rebound phase.
> IMO the "Right Price" for WTI is $65-$75, with $65 being the level justified by supply/demand fundamentals and $75 the level appropriate considering the geopolitical risk in the Middle East.
John Kemp is a very smart guy that writes opinion pieces for Reuters. He lives in London where the "gloom & doom" is even worse than it is here. We are all impacted by our environment and I believe John's views on oil prices are more bearish than mine because the Brexit noise in the UK. If John's articles turn bullish on oil, then maybe the oil traders are also turning bullish. Here is what John Kemp wrote this morning. BTW I do email John from time to time, but he never response.
COLUMN-Oil prices rise on optimism about economy in 2020:
17-Dec-2019 14:42:16
John Kemp is a Reuters market analyst. The views expressed are his own
Chartbook: https://tmsnrt.rs/2PSMGgW
By John Kemp
LONDON, Dec 17 (Reuters) - Crude oil traders have become progressively more bullish about the outlook for prices since the beginning of October as the trade war between the United States and China has eased, lifting concerns about a global recession.
Deeper production cuts by Saudi Arabia and its allies in the expanded OPEC+ group of oil exporters, announced at the start of this month, have probably accelerated the bullish shift.
But production cuts are a second-order effect. The rise in oil prices has been primarily driven by greater optimism about the outlook for global trade and the economy next year
Manufacturing surveys and data on industrial production in the United States, China, India and Germany have all started to show tentative signs that the recent slowdown in global growth and trade may be bottoming out.
In the United States, the Federal Reserve has cut interest rates three times by a total of 75 basis points since the middle of the year in a bid to extend the current expansion.
In China and India, governments have announced stimulus packages and encouraged increased bank lending to revive their economies. Even Germany has started to discuss using fiscal policy to stimulate more growth.
As it enters a re-election year, the Trump administration’s focus is shifting from trade war to stimulating the economy, accelerating growth and boosting jobs and wages.
With so much fiscal and monetary stimulus around the world, and the electoral cycle entering a strongly pro-growth phase, crude traders are betting oil consumption will grow faster next year.
LOADING UP
Hedge funds and other money managers have purchased crude futures and options equivalent to almost 320 million barrels since Oct. 15 (“Oil traders bet on economic upswing in 2020”, Reuters, Nov. 22)
Buying started long before OPEC+ announced its decision to deepen production cuts at the start of this month and instead coincided with the rise in U.S. equity prices.
The timing strongly suggests rising oil prices are primarily tied to an improving consumption outlook rather than expectations about production cuts.
As a result, oil prices have continued to rise despite scepticism about whether OPEC+ will actually remove extra crude from the market next year.
Front-month Brent futures prices have increased by more than 13% ($7.50 per barrel) from their recent lows in early October. In the same interval, the broad-based U.S. S&P 500 equity index has risen almost 10%.
Brent’s six-month backwardation, which is probably a more accurate measure of expected market tightness, has risen to $3.60 per barrel from $2.00.
Rising crude futures prices are a gamble the global economy will continue expanding, probably at a faster rate, through 2020.
Oil consumption growth is now heavily geared towards emerging markets, especially China and India. Rising oil prices are a bet that one or both will experience a cyclical upswing next year (“India’s economic recovery critical for oil in 2020”, Reuters, Dec. 11).
REVISITING 1999
If traders’ expectations prove correct, continued and accelerating consumption growth, meeting continued production restraint by Saudi Arabia and the rest of OPEC+, could create conditions for a cyclical increase in oil prices similar to 1999/2000. < Go back and take a hard look at slide 4 of my Dec. 14 podcast. From 2000 to 2008 the oil price increased over 400%.
In the late 1990s, global economic growth accelerated after the Federal Reserve cut interest rates three times by 75 basis points in 1998 in the wake of the Asian financial crisis and Russia’s debt default, while OPEC continued to restrain production until well into 2000, causing the physical market to tighten sharply.
The result was a sharp backwardation and a surge in oil prices through 1999 and into the first quarter of 2000 (“Oil and equities prepare to party like it’s 1999”, Reuters, March 19, 2019).
Expectations for the same conditions drove prices sharply higher in the first four months of 2019; traders are betting again on the same outcome in 2020.
If prices rise too rapidly, Saudi Arabia will come under pressure from the White House to restrain them by boosting production.
Brent prices above $75 risk provoking a response from the U.S. president on Twitter, just as they did in 2018 (“Oil prices are re-entering the Tweet zone”, Reuters, Sept. 13, 2018).
In the meantime, however, traders are betting that prices have some room to rise before they draw a political response.