The latest (of many) rumors and official jawboning say that OPEC have come to a deal to adjust production. But there’s a number of problems with this. Even if we put aside the fact that OPEC has lost the clout it once commanded, and ignore the internal politics, rivalries, and animosity that plagues the herding of the OPEC cats, the near term outlook for oil appears bearish.
1. Negative seasonality
Perhaps the biggest obstacle for oil over the next couple of months is the negative seasonality that tends to kick in. While there are always exceptions to the rule when it comes to seasonal price patterns, if you have negative seasonality line up with other bearish factors then you certainly find cause to raise conviction in bearish views and apply caution to any long bets. In any case it raises the stakes for OPEC to deliver.
Michael Mauboussin: Challenges and Opportunities in Active Management And Using BAIT #MICUS
Michael Mauboussin's notes from his presentation at the 2020 Morningstar Investment Conference, held on September 16th and 17th. Q2 2020 hedge fund letters, conferences and more Michael Mauboussin: Challenges and Opportunities in Active Management Michael Mauboussin is Head of Consilient Research at Counterpoint Global in New York. Previously, he was Director of Research BlueMountain Capital, Read More
2. Spike in uncertainty
The Sentix investor sentiment poll showed a big spike in uncertainty on the outlook for oil – while this is completely understandable given the confluence of competing factors that are weighing on the outlook, in the recent past a spike in uncertainty preceded a number of falls in price. So while things could be different this time, the spike in investor uncertainty on crude oil along with negative seasonality presents a pair of warning signs for anyone caught up in the OPEC euphoria.
3. Stretched futures positioning
Crude oil speculative futures positioning remains stretched to the long side which presents a third technical hurdle for oil. While it has come off a bit in recent weeks the market is still relatively long meaning less new buyers and a source of potential selling if push comes to shove. It’s not quite at the extremes that saw the last 3 big tops it’s certainly not helpful for the outlook for crude oil prices. The other point is that the pattern tends to be that it gets to an extreme and then rolls over.
4. (but) OPEC has had an important impact in the past
The graph below shows how the oil accord of 1999 pushed up oil prices – it may have partly been a matter of timing; coming at a point when the economic crises (Asia, Russia) had mostly run their course, but it does provide some food for thought. OPEC has the *potential* to move the market if it really wants to (if as a group they can find the willpower). Having said that, it is important to remember that OPEC does not control the same market share that it did back then as the US through shale oil is now also a major producer and other regions have stepped up production as the old circa-100 price range incentivised all sorts of exploration capex and projects to be scaled up.
Tying it all together, it’s important to note that if OPEC truly wanted to and could find the collective willpower it could have a major impact on balancing out supply and demand in the oil market and could drive prices beyond $50 even $60. But I remain pessimistic on the prospects of OPEC to deliver a deal, the backdrop and drivers are so much more complicated now. There’s certainly scope for surprise, but for now I would focus on some of these short-term hurdles the market has to over come.
Between negative seasonality, the spike in uncertainty, and stretched futures positioning, the technical backdrop is bearish for oil. This raises the stakes for OPEC and warrants caution against getting overexcited about the bullish case.
Bottom line: Despite excitement about the OPEC news, crude oil prices face a number of short term hurdles.