• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing

The OPEC March Meeting Is Turning Out to Be Very Interesting

Those blindly chasing the reflation trade tick for tick, better pay heed to physical market fundamentals.
By MALEEHA BENGALI
Feb 23, 2021 | 09:33 AM EST
Stocks quotes in this article: GS, MS

Two big sell side commodity houses, Goldman Sachs (GS) and Morgan Stanley (MS) , back to back have raised their oil price forecasts yet again calling for $70/bbl. Brent by Q2, nudging it higher by $10/bbl. Apparently the rise of 30% in Brent Oil price since the start of the year compels them to do so. Anyone could be forgiven for thinking they missed the "Super cycle" and rush to upgrade their numbers and forecasts before they "look too out of sync" with screen prices. Most generalists who trade oil futures may not understand the structure and dynamics of contango vs. backwardation and physical market dynamics. Today that is the state of the oil market as most trading it are just trading the spot due to the commodity reflation trade as yields tick higher, but not seeing what producers are doing at the back end of the curve. Let's ask ourselves what is going on.

Taking a little trip down memory lane. Last year when hints of Covid was striking the world and oil prices started easing from highs of $70 down $60/bbl., we all remember how Saudi Arabia decided to launch an oil production war, at possibly the worst time in the history of oil, as Russia did not play ball to cut production back then. They opened the taps full on at a time when the world was shutting down slowly as pandemic induced government wide lockdowns and travel came to a halt. That sealed oil's fate, we all know what happened, and the rest is history. The aim was to teach Russia a lesson which severely backfired. Fast forward this year, as OPEC - mostly Saudi Arabia - needs much higher oil prices to balance their budgets, decided to take an additional 2 mbpd of oil out of the market in February and March, the peak of winter heating demand! Forgetting Covid, this is the time of year when demand picks up anyway due to heating oil. We all know how bad things can get, look at the Texas freeze, as heating demand surged through the roof. Even though the market was "normalizing" as prices rallied to $50 from $38/bbl., they decided to tighten the market anyway just to make sure prices stay supported. Low and behold oil prices have risen so fast, this brings a whole new set of problems.

Non-OPEC will and is starting to produce more. Take a look at rig counts. To keep OPEC+ happy they will need to release their voluntary cut of 2 mbpd which means about 2.35 mbpd of more oil coming to the market towards April. The irony is this is a time when demand tends to fall off anyway, we lovingly in the industry call it "shoulder season". It means just that, between two strong demand seasons, it is a time when things cool off, and demand pulls back a bit. Seasonality is extremely important for oil, and more than people think. It is not just an inflation, commodity super cycle spot play. It is an extremely big physical market that dictates its prices. The oil market just tightens or loosens in a short period of time. Unfortunately, or fortunately, it fell and rallied much harder given Saudi barrels.

The OPEC+ meeting is taking place on March 4-5th. OPEC+ members are itching to start increasing their production as they watch the entire world monetize on such fabulous higher prices while they have been waiting since $38/bbl. and holding out. Russia is already suggesting that. Saudi may not have a choice to release more oil. It would have been much timelier to have taken oil out of the market during April than February. Now that vaccines are rolling out globally, we are still far from fully opening up. Do we really think global travel and demand will normalize by April this year?

Morgan Stanley talks about 2.8 mbpd of oil drawdown in Q1 that tightened the markets. We wonder what would have been the case if it were not for Saudi's cut. Demand is still about 5-6 mbpd lower than last year pre-Covid levels. We are nowhere near normal. Yes, there will be a recovery, but that could be six months away. That is a lot in an oil trader's investment horizon. Those blindly chasing the reflation trade tick for tick, better pay heed to physical market fundamentals. When micro ties in with macro, that is the sweet spot. But when fundamentals go the other way, macro does not stand a chance.

(Goldman Sachs is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells GS? Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Maleeha Bengali had no position in the securities mentioned.

TAGS: Commodities | Economy | Investing | Markets | Oil | Stocks | Trading | Middle East | Russia |

More from Investing

Market Looks Good from Above, Poor From Below

James "Rev Shark" DePorre
Jun 29, 2022 4:21 PM EDT

The major indexes held up well, but underneath, it wasn't pretty.

This FAANG Stock's Technicals Are at a Summer Crossroads

Bob Lang
Jun 29, 2022 3:30 PM EDT

Summer is a time when this name usually gains momentum. Will it this time?

Kass: Untapped Homeowners Equity and Imbedded Gains Will Be a Ballast to Growth

Doug Kass
Jun 29, 2022 3:00 PM EDT

Homeowners equity has more than tripled in the last decade.

Can Pinterest Poke Through the Charts and Rally?

Bruce Kamich
Jun 29, 2022 2:48 PM EDT

With a CEO change in the mix, shares hit, and a social media under watch, let's see whether PINS could move the needle.

Let's Process Nvidia's New Low

Bruce Kamich
Jun 29, 2022 1:47 PM EDT

NVDA moves down, so let's check the charts -- and see why we should take too much bearishness with a grain of salt.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 04:51 PM EDT PAUL PRICE

    We should be in for better starting soon.

    Window dressing tomorrow, the last day of ...
  • 11:56 AM EDT STEPHEN GUILFOYLE

    Stocks Under $10

    Check out what's going on in the Stocks Under $10 ...
  • 12:04 AM EDT PAUL PRICE

    Two Good Signs -- Especially for Small-Cap Investors

  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login