(WCTW) Oil Continues To Climb The Wall Of Worry

Market participants are doubting this oil market rally. Heck, we even fell victim to it last week when we said that we would have a pause first before we move higher. The pause never happened and WTI is at ~$91.52 today with visibility to $93.2 to $94.2 (the next key resistance level). 

What is it that's giving market participants so much to worry about? Why aren't energy stocks moving higher alongside oil?

I think if we are being truthful to ourselves, the reality is that the oil deficit is only here because of the voluntary cuts from Saudi and Russia. Now granted, in OPEC's latest oil market report, it saw a deficit of ~3 million b/d, so even if you take away the voluntary cut, the deficit would have been ~1.5 million b/d.

But the size and magnitude of the cut is what's giving market participants a cause for concern. Just how long can the Saudis keep this up? And what happens to demand when prices rise to $100/bbl?

In our experience, the market is seldom perfectly rational. How can it be? In the case of oil, the narrative today is that the deficit is only here because the Saudis and Russians are cutting extra barrels out of the market. But what the market continues to miss is that these are real supply cuts with real inventory implications.

Draws are starting to happen and whether OPEC+ is right about the 3 million b/d deficit or 1 million b/d is irrelevant. Inventories will decline and there's nothing the global oil market can do about it. That's the nature of a commodity business.

We are starting to see this tightness manifest itself in the physical market.

We have not seen such strength in backwardation since Q2 2022, and it bodes well for global balances going into Q4. At this level of backwardation, the implied deficit is close to ~2 million b/d.