Oil Price: Comments from HFI Research on Sept 21

[dan_s]

My comments are in blue.
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In the years I've followed the oil market, I've never seen a larger disconnect between reality and fundamentals, never. There are some notable years like early 2017, late 2018, and 2020. But I think this is the first time that the market is trying to front-run the prospects of a horrendous demand drop-off. I mean just look at this chart on speculator positioning on diesel.

That's just wild. And it's not just diesel. The entire oil complex remains extremely bearish.

What's also really interesting about everything I'm seeing in oil today is that the bear thesis is well-known. Most of the oil bulls I'm following can recite the bear thesis as well as the bears, and what the bears are failing to acknowledge is that because positioning is so one-sided, most of that bearishness may be priced in already.

In addition, I'm not seeing a lot of bears acknowledge the fact that their bearish oil price forecast would translate to lower non-OPEC supply growth, something we repeatedly pointed out over the last 2-weeks. < As I have posted here many time, I believe IEA is over-estimating U.S. oil supply growth and they have a long history of under-estimating demand growth.

Similar to how a lot of oil bulls failed to acknowledge the falling oil demand in 2022 due to high oil prices, oil bears are not acknowledging that lower oil prices will mute supply growth, which will make the perception of reality (supply growth outperforming) not come to fruition.

As a result, I'm debating between being really long oil to being really really long oil.
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> There is no "glut" of oil. Oil and refined product inventories above ground are at or below normal for this time of year. U.S. distillate inventories, primarily diesel and heating oil, are ~10% below normal.
> OPEC+ will not abandon their production quota system because it is working. Saudi Arabia wants Brent over $80/bbl and they control most of the ability to raise oil production.
> The FEAR of "Drill Baby Drill" is over-blown. U.S. oil production has been lower in first half of this year than they were in December, 2023.
> There is SERIOUS SUPPLY RISK due to wars in Russia and the Middle East that is not priced in to oil price.
> This is a capital intense business and the Fed lowering interest rates is good for the industry. It should also draw more attention to the companies that pay high dividends. The average dividend yield of the 12 companies in our High Yield Income Portfolio is over 8%. Three of them (BSM, KRP and CIVI) have sustainable dividend yields over 10%.