Peak Bearishness Returns To The Oil Market
With the oil market, the equilibrium never exists for long. It's as if the market thrives on being bipolar. For readers aware of this tendency, there's a lot of profits to be made. While we were right to have called the near-term top in oil back in early April, the current pullback is catching us by surprise. We thought WTI would have bottomed at $78/bbl, but with prices now trading a hair below $73, that bottom call was off on timing and magnitude.
Rinse and Repeat
At the start of 2024, we wrote that the oil market was going through peak bearishness. Market participants expected large inventory builds to start the year and although OPEC+ had announced a large voluntary production cut for Q1 2024, market participants failed to believe the effectiveness of the cut. In addition, speculator positioning reached a new cycle low, and energy investors were very close to throwing in the white flag (including us).
Fast forwarding to today and many of the same recipes exist. Following OPEC+'s production cut announcement this past weekend, the Q3 extension was seen as bearish. While consensus expectation coming into this meeting was too bullish (expecting a cut into year-end), the market suddenly forgets that the Q3 voluntary production cut can and will be extended to year-end if market conditions warrant.
So it's with this irony that we think many of the things we saw in Q1 are starting to rinse and repeat themselves. That is really the nature of the oil market and why it's so hard to navigate it profitably.