Let the Oil Short Begin – Oil Fundamental Analysis

Planned OPEC+ Output Increase in May

Only 350k barrels / day increase planned, but it’s still a net add in a market that is looking increasingly oversupplied.

Climate Accords

The on-demand climate accord that Biden summoned is clearly signaling a major shift in focus that will affect energy markets for years. I don’t think the current news of the summit will have the longest lasting effects, but rather the policy changes that trickle out globally over the next month.

“Avril Haines, President Biden’s director of national intelligence, told world leaders on Thursday that climate change was no longer a peripheral issue but now “at the center” of U.S. foreign policy…”  https://www.nytimes.com/live/2021/04/22/us/biden-earth-day-climate-summit


EV Takeover Continues

Electric vehicle growth is insane, I see Teslas everywhere.  According to a 2017 report on transportation by Stanford University’s Tony Seba and James Arbib, the coming adoption of EVs as the preferred mode of transportation will soon impact demand enough to trigger a permanent fall in oil prices (and a 30% drop in production by 2030), posing an existential threat to many oil producers worldwide.  https://www.atlanticcouncil.org/blogs/ukrainealert/time-for-ukraine-to-exit-russias-energy-empire/


COVID19 Continues to Attack Global Travel Ambitions

COVID infections hit a new record in many countries today, but of particular note, India hit a new daily record in cases surpassing the US for the most daily infections ever.  Even parts of the US like Michigan are still at record levels.  There is a good chance that COVID will be with us for the next couple of years, tempering travel and therefore oil demand in substantial amounts.  I believe this report from the IEA paints an overly optimistic expectation of demand and is now nearly two months old, and does not take Iranian oil into account.  https://www.iea.org/reports/oil-2021


Iran May Re-enter Global Oil Markets

US Nuclear talks with Iran pose substantial odds for Iran’s re-entry into the global Oil export market, which will be a strong source of supply.  https://www.investing.com/news/commodities-news/oil-down-2-on-talk-of-imminent-deal-for-iran-to-export-crude-again-2481251


Lower Oil Prices May be the US’ Best Weapon to Counter Russia

Russia is posed to invade Ukraine, therefore US policy is very likely allow substantial pressure in oil prices as that will continue to have a very derogatory effect on Russia domestically, continuing to cause pressure on the Russian government to invest in its people instead of war.  Russian protests happened all over the country today, as they deal with Putin’s poisoning of Navalny, and an ongoing reduction in living standards due to COVID and economic malaise.  Read this article from the Atlantic Council to see how lower oil prices have historically been the demise of authoritarian regimes… one can only hope.  And the US is particularly motivated after being embarrassed for the last 4 years by our own pro-Putin president.



Oil Hedging

It’s hard to imagine that oil companies can restrain themselves from hedging their supply given the rapid rise from negative territory, and the fundamental backdrops already discussed.  Additionally the US Dollar may be entering a bounce phase which is negative for commodities generally.



Oil Technical Analysis

Oil has risen from the ashes, starting of -$40, 0 or $6 depending on how you want to count it.  We think it is due for a correction and that correction has begun.  It seems likely that the correction will take the form of an ABC.  A & B may be complete and C is underway.

By connecting the highs and duplicating that line we have given ourselves a reasonable trend-based target that also comes in at approximately 38.2%, which is reasonable given the strength of the uptrend and the strength in commodities in general.

Given the fundamental analysis above, we feel there is a possibility that oil could overshoot substantially… but that remains to be seen.

Oil Technical Analysis

We see a clear B channel / triangle (labelled 1-5 as C of B) within an expected large ABC.

Another High First? No Sell all Rallies

While there is a chance this first down move is a 4th wave in the previous rally targeting higher, we see this as unlikely given the strength of the move so far, the fundamentals listed above, and because oil has a history of being one of the hardest hedged commodities on the planet.