The oil market had been in a side-wards trading range all August, then the price dropped in the early days of September on demand concerns. Prior to the OPEC+ September JMMC meeting held yesterday, there were whispers to increase production as things looked stable and most producers had been holding back since April. But then prices collapsed back to sub $40/bbl. Brent raising concerns amongst the key OPEC players as to why the market was not stable despite them having taken off about 7.7 mln bpd out of the market! As expected the cartel left the production quotas unchanged but the matter of overproducing, cheating, was an issue. This time other than Iraq and Nigeria, it was UAE and Russia that had produced above their quotas in August. This was a moot point and they were unable to point fingers but had to talk about it in general terms that members had until the end of September to cut back on their overproduction.
One of the main highlights from the meeting was when the Saudi Minister enacted his Dirty Harry imitation and said "Go ahead, make my day", targeting the short sellers in case they decided to lean on the oil price, he would teach them a lesson. The oil price has been their nemesis given its constant failure to hold on to gains which they so desperately need. It seems these threats are all they have left - an act of desperation to coerce people to buy the commodity. If one were to look at the spec CFTC oil report, it would be blatantly obvious that shorts had not been leaning over the market, longs had been liquidating as seen in the last week report. Every time they try to buy the market, value call, because it is cheap, it goes against them and gets even cheaper. That is the problem. Shorts have not even started pressing over the price yet.
What OPEC+ members need to realize is that demand is just not where it needs to be or where it was pre-covid levels. Judging by travel restrictions, and the higher number of cases, travel demand is just not where it typically is. That is affecting inventories as seen in gasoline and distillate. We have lower demand at a time of too much supply. By cutting production since 2017 onwards, all we have done is delay the inevitable problem because as soon as the oil price rises, all this extra oil can come back to the market. The only way the price can rise sustainably is if all the excess supply was permanently closed off and players cleaned up. But that is too politically contentious a notion to fathom. Unfortunately, the oil price has never been left to true price discovery. That is the essential problem as these countries need prices as high as $80/bbl. plus Brent to justify their budget deficits and spending plans. Then we have the matter of U.S. shale that is happy to produce with prices above $45/bbl. WTI.
Even bear markets can have periods of seasonality whereby the price can rise. It is a matter of timing it and gauging what the demand is vs. the supply. It is easy to list all the projects and see the supply side of things, but gauging the demand especially during a pandemic, is extremely hard. But for the market to get tighter, prices need to stay lower for longer before the inventories are more balanced. Now that the Economist and every journal has said that oil is dead, one can play the contrarian trade and call the bounce, but it may be preemptive. The situation continues to be monitored but as they say, cheap can always get cheaper. It all depends on your investment horizon and mandate, but for us hedgies, timing is everything.
