Comm: Precious

(Houston)

The oil market is continuing to experience some deep tremors after a great year. The oil benchmark dropped another 1% yesterday, bringing prices down to their lowest level in three months. After months of rising on concerns of weak output, the market is plunging on the threat of oversupply, especially from Russia and OPEC countries. Additionally, the IEA put out a report saying it saw global oil demand falling, another factor which weighed on the market. In addition to worries about rising supply and weakening Chinese GDP, Commerzbank commented that “The unexpected increase in U.S. crude oil stocks by 629,000 barrels reported by the API is generating headwind, as is a sharp rise in Russian oil production”.


FINSUM: It is starting to feel like the tide might really be turning on the oil market, which has had a great 18 months.

(Houston)

The oil market has been doing very well for the last year and a half or so, and has performed especially strongly in 2018, outperforming every major asset class. However, US oil prices fell over 4% yesterday on growing fears of a boost in supply, following a 5% drop last Wednesday. Most of the gains in the market over the last 18 months have been because of coordinated supply cuts by world oil powers. However, while there still are some supply constraint issues on the table (e.g. US sanctions on Iran), the increasing worry is that production may rise more than expected, which would bring prices back down. Further, the US is indicating it may start to use some of its strategic oil reserves in order to avoid another sharp move higher in prices.


FINSUM: To be honest, we have been surprised by how well OPEC has been able to hold the output cut alliance together, so we really should not doubt their ability to continue to do so. That said, we do see at least a plateau coming in prices.

(Houston)

Investors in oil need to be aware—the market is increasingly looking like a price surge is in store. Supply constraints are currently looming over the market, which has pushed prices to a 3.5 year high. Now, some are calling for a spike that would take oil to $150 or, almost double the level of now. The call comes from renowned research house Sanford Bernstein. The logic is that the oil price tumble over the last few years has caused “chronic underinvestment” in supply which will power the next “supercycle”. According to Bernstein, “Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008”.


FINSUM: The view here seems sound. However, we must saw\y that there is one overarching logic that bothers us about this call—that the world has bountiful oil that has becoming ever cheaper to extract. That makes us think supply constraints could be overcome more quickly.

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