In my opinion, the global energy crisis isn't over; hence there are many reasons why being bullish on oil makes sense, and in this idea, I will try to analyze most of them one by one.
First of all situation between Russia-Ukraine doesn't look any good, and it also heavily affects Europe, which is essentially directly involved in this war. Currently, gas from Russia to Europe is lost and can't be replaced because Russia has cut flows while someone sabotaged the gas pipelines. At the same time, Europe is about to ban Russian oil from being sold to Europe while also trying to apply price caps on oil and natural gas. All these essentially increase the oil demand (to replace natural gas) while also decreasing production in case Russia cannot sell that oil to somebody else. As if these aren't enough, as many foreign oil companies managing the production have left Russia, its oil production could drop even more as they don't have the knowledge and ability to control the oil fields themselves.
The oil prices remain under control simply because the US keeps releasing oil from its SPR while China keeps pursuing its zero Covid policies. The US eventually will have to stop releasing oil from its SPR because the SPR was created for an emergency, not to keep prices low to buy votes. Not only will the US have to stop emptying its SPR, but it will also have to refill it. Also, China will eventually realize its futile attempt to contain omicron and stop its lockdowns. Essentially just the combination of the two would be an incredibly bullish development for the price of oil, as a lot of supply would come off the market. At the same time, demand will increase massively as Chinese citizens want to travel and consume more.
Unfortunately, the US and the world are pursuing catastrophic policies regarding the energy sector instead of pushing investments into it. The windfall taxes on the energy companies will discourage investors from putting money in while starving companies of cash they could have used to invest in more energy production. At the same time, many rules against the extraction of fossil fuels and nuclear energy production are making things even worse. As if these haven't been enough, the US is also talking about an export ban, which, if implemented, would have catastrophic consequences for the world and the US. It would create a massive imbalance in the oil market, which would already have severe issues due to the European embargo on Russian oil.
Recently OPEC+ announced oil production cuts, and the tensions between the US and Saudi Arabia have increased significantly. While the US refuses to increase its oil output, OPEC+ cut production by 2 million barrels daily. However, here is the thing... OPEC+ agreed to reduce output that it was not achieving. The truth is that OPEC+ has reached its production limits, and most countries are failing to meet their quotas. There is no spare capacity, and it is tough for them to increase their output. Essentially the cut so far was mostly an admission that they can't produce more.
Saudi Arabia and OPEC+ want to keep the price of oil around 80$ and are ready to cut production to counteract the Fed's actions to reduce demand by hiking interest rates. There is an ongoing war been energy producers and Central banks, and the more central banks hike interest rates, the more energy producers will have to cut. Of course, with all the rate hikes and the global economy in a silent depression, we are slowly moving into a brutal recession in the next 6-12 months, which could knock oil prices much lower for a while. However, as central banks are already being forced to pivot, dumping reserves and resuming QE, we could see them and governments trying to stimulate an energy shortage, which could increase oil prices. Finally, the US has talked about refilling its SPR when prices are below 60-80$, while the Saudis talked about cutting production if the prices are below 80$. This means that the price area between 50$ and 80$ is worth going long, as the US and OPEC+ are creating a price floor by reducing supply and increasing demand.
So what's the trade? Accumulate oil in the 50-90 area. No stops. Target 250-300$. Time horizon - 2 years.
First of all situation between Russia-Ukraine doesn't look any good, and it also heavily affects Europe, which is essentially directly involved in this war. Currently, gas from Russia to Europe is lost and can't be replaced because Russia has cut flows while someone sabotaged the gas pipelines. At the same time, Europe is about to ban Russian oil from being sold to Europe while also trying to apply price caps on oil and natural gas. All these essentially increase the oil demand (to replace natural gas) while also decreasing production in case Russia cannot sell that oil to somebody else. As if these aren't enough, as many foreign oil companies managing the production have left Russia, its oil production could drop even more as they don't have the knowledge and ability to control the oil fields themselves.
The oil prices remain under control simply because the US keeps releasing oil from its SPR while China keeps pursuing its zero Covid policies. The US eventually will have to stop releasing oil from its SPR because the SPR was created for an emergency, not to keep prices low to buy votes. Not only will the US have to stop emptying its SPR, but it will also have to refill it. Also, China will eventually realize its futile attempt to contain omicron and stop its lockdowns. Essentially just the combination of the two would be an incredibly bullish development for the price of oil, as a lot of supply would come off the market. At the same time, demand will increase massively as Chinese citizens want to travel and consume more.
Unfortunately, the US and the world are pursuing catastrophic policies regarding the energy sector instead of pushing investments into it. The windfall taxes on the energy companies will discourage investors from putting money in while starving companies of cash they could have used to invest in more energy production. At the same time, many rules against the extraction of fossil fuels and nuclear energy production are making things even worse. As if these haven't been enough, the US is also talking about an export ban, which, if implemented, would have catastrophic consequences for the world and the US. It would create a massive imbalance in the oil market, which would already have severe issues due to the European embargo on Russian oil.
Recently OPEC+ announced oil production cuts, and the tensions between the US and Saudi Arabia have increased significantly. While the US refuses to increase its oil output, OPEC+ cut production by 2 million barrels daily. However, here is the thing... OPEC+ agreed to reduce output that it was not achieving. The truth is that OPEC+ has reached its production limits, and most countries are failing to meet their quotas. There is no spare capacity, and it is tough for them to increase their output. Essentially the cut so far was mostly an admission that they can't produce more.
Saudi Arabia and OPEC+ want to keep the price of oil around 80$ and are ready to cut production to counteract the Fed's actions to reduce demand by hiking interest rates. There is an ongoing war been energy producers and Central banks, and the more central banks hike interest rates, the more energy producers will have to cut. Of course, with all the rate hikes and the global economy in a silent depression, we are slowly moving into a brutal recession in the next 6-12 months, which could knock oil prices much lower for a while. However, as central banks are already being forced to pivot, dumping reserves and resuming QE, we could see them and governments trying to stimulate an energy shortage, which could increase oil prices. Finally, the US has talked about refilling its SPR when prices are below 60-80$, while the Saudis talked about cutting production if the prices are below 80$. This means that the price area between 50$ and 80$ is worth going long, as the US and OPEC+ are creating a price floor by reducing supply and increasing demand.
So what's the trade? Accumulate oil in the 50-90 area. No stops. Target 250-300$. Time horizon - 2 years.
Comment:
Of course, there are some bearish scenarios for oil, and they could play at any time:
1. Saudi Arabia does what the US says
2. The situation between Russia and Europe gets better (No war, no embargo)
3. Lifting sanctions on Venezuela and Iran
4. US and Europe changing their stance towards oil companies and allowed for more fracking/drilling
5. China never gets out of lockdowns
6. A crash of the global economy like in 08-09, while central banks and government don't print much money
7. The US doesn't refill its SPR
All these are possible, but they aren't very likely. These things can keep oil prices very low, but I doubt they will happen. So yes, I see potential downside scenarios, but most of these would simply provide buy-the-dip opportunities
1. Saudi Arabia does what the US says
2. The situation between Russia and Europe gets better (No war, no embargo)
3. Lifting sanctions on Venezuela and Iran
4. US and Europe changing their stance towards oil companies and allowed for more fracking/drilling
5. China never gets out of lockdowns
6. A crash of the global economy like in 08-09, while central banks and government don't print much money
7. The US doesn't refill its SPR
All these are possible, but they aren't very likely. These things can keep oil prices very low, but I doubt they will happen. So yes, I see potential downside scenarios, but most of these would simply provide buy-the-dip opportunities
Comment:
Very very important update! A big recession could crush oil demand in the short term. Based on the signals we are getting from the yield curve, this recession could be pretty deep.
A lot will depend on how much the Fed will hike from here, but I doubt they will walk more than 1% in their next four meetings. Honestly, they have reached their limit, and the maximum interest rate they will get is 4.5-4.75%, with the current rate being 4-4.25%.
I'm not sure how significant the collapse in currencies, commodities, stocks, bonds, or crypto will be, or if there is any collapse... but the pivot is coming, and I think we will first get a shakeout in oil and then go higher. Of course, I know this could happen anytime, and I feel this crash/correction is getting closer. 43$ & 54$ are incredible targets and places to go long.
Patiently accumulate and don't put in too much now. The worst case is we start going long above 95$ if the market closes above it.
Very very important update! A big recession could crush oil demand in the short term. Based on the signals we are getting from the yield curve, this recession could be pretty deep.
A lot will depend on how much the Fed will hike from here, but I doubt they will walk more than 1% in their next four meetings. Honestly, they have reached their limit, and the maximum interest rate they will get is 4.5-4.75%, with the current rate being 4-4.25%.
I'm not sure how significant the collapse in currencies, commodities, stocks, bonds, or crypto will be, or if there is any collapse... but the pivot is coming, and I think we will first get a shakeout in oil and then go higher. Of course, I know this could happen anytime, and I feel this crash/correction is getting closer. 43$ & 54$ are incredible targets and places to go long.
Patiently accumulate and don't put in too much now. The worst case is we start going long above 95$ if the market closes above it.
1. You don't need to only go long on oil.
2. You can use different instruments that wouldn't have a negative price if you are afraid the price might crash too hard.
3. You can put your stops below 30-40$ if you insist on going in with a more significant amount and need stops.
4. You could wait for a market crash and then go long. It is possible that because of all the rate hikes, the oil market craters. A strong USD and high-interest rates could destroy a lot of demand for oil in the short term, and that's why its price could fall a lot. It's the response to the crash that would make it go up a lot - a) SPR draws stop - refill begins, b) OPEC+ cuts, c) Fed and Central banks doing whatever it takes to restimulate the global economy and save markets.