The Oil Bears Threw The Kitchen Sink And If Oil Refuses To Break Lower, Then We Are Headed Higher

Oil prices have been nothing but volatile this year. We've had many narratives back and forth in the oil market that has driven headline price moves and sentiment. Some of the themes that are still around today are:

• SPR release dampening oil prices.

• Russian oil production will fall from sanctions.

• A global economic slowdown will push demand lower.

• OPEC+ spare capacity is limited.

• Iran sanctions.

• China's zero COVID policy.

And over the last few months, the oil bears have had the upper hand. A global economic slowdown looks all but inevitable in the months ahead. The Fed is signaling to the market that it will continue to raise interest rates to fight inflation. China's unrelenting "dynamic" zero COVID policy artificially pushed down Chinese oil demand by ~2 million b/d. A constant "possibility" of the Iran deal being brought back to the table. Finally, the IEA published a report in April noting Russia would lose ~3 million b/d of production thus forcing IEA to announce a globally coordinated SPR release of ~1.5 million b/d.

There have been a lot of headwinds and yet, oil prices remain elevated with WTI trading at ~$85 and Brent trading above ~$90.

For much of this summer, we have been in the cautious camp as we thought the headwind of a global economic slowdown and the nonexistent drop in Russian oil production would be possible bearish headwinds for the oil market. But since then, a lot of facts have changed, and despite the oil bears the best effort in trying to push oil down, it has remained resilient.

One of the key variables that may finally be showing up is the Russian oil production issue. With Nordstream 1 indefinitely offline now and European natural gas prices falling, Russia's only remaining weapon against the west is its oil exports. Since the start of the war, Russia's crude exports rose versus the assumption that it was going to fall. Despite this fact, IEA still went ahead with the SPR release of ~1.5 million b/d. In turn, not only did the oil market have to absorb this additional SPR release, but there was no offsetting supply factor to balance this. But this may be changing.