Thoughts on oil: FXWW

From the FXWW Chatroom – We are seeing the result of a perfect storm where supply and demand have both moved in the wrong direction, and prices have declined to the point where liquidation is being forced on those who got out too late. How did we get to this point so suddenly? OPEC+ was essentially “tricked” by the US into ramping up supply. The WH did a bait and switch on them by making them think there would be a supply shock due to Iran sanctions, and then provided a lot of waivers for the sanctions at the last minute. At the same time, predictions for US shale production in 2018/2019 are coming in higher than expected, while global demand forecasts for 2019 are getting cut. OPEC now finds itself in a similar situation as 2014, when they had to choose between two difficult options – cutting production to support the market but still face a losing battle against US shale for market share, or keep supply constant and force prices to a point where US shale had to cut back significantly. In the OPEC meeting of Nov 2014 they chose the latter option, and that resulted in WTI dropping from 73 to 44 in the span of two months and eventually to a low of 26 in Q1 of 2016. The strategy succeeded in curbing US shale growth, and the market was brought back into balance by 2017. At the OPEC meeting in December this strategy will likely resurface again. The difference between today and 2014 is that we are faced today with a slowing macroeconomic and trade backdrop, so production cuts will struggle to keep up with demand forecasts that keep getting revised lower. We have not seen the end of this selloff, in fact we might only be around the halfway point.

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