The TV talking heads, most of whom have never advised an actual oil company, were out in force yesterday.
As one, they were once again pointing out that the Russia-OPEC oil production “freeze” is not a production cut.
That’s correct.
They also said that freezing production at January levels, the highest in recent memory, puts the bar quite high.
That’s also true.
But, once again, they couldn’t be more wrong.
You see, the talking heads are missing the bigger picture. What the oil market is experiencing right now is not a supply problem…
It’s a supply expectation problem.
Having spent some four decades in this business, and advised numerous oil companies and governments, I know…
The last time this happened, oil was over $100 a barrel…
Psychology, Not Supply, is Key to Oil Markets
Much of what we’re seeing in the oil market right now is psychological. Everyone knows that there are additional extractable reserves that can be brought to market at any time.
That means the market can’t reach equilibrium. In this kind of environment, it is all too easy to short oil and drive the price back down.
Yesterday’s performance crude price performance indicated this all too well – oil may be finding a bottom, but in this environment it’s not going to spurt up anytime soon. After rising almost 8.5% last week, crude settled down 4.5% yesterday.
Now, Friday also marked the end of one futures front-end month contract and the advent of another.
In other words, the listed price for oil that shows up on computer screens all around the world rolled over from one contract to another. As they may be trading at different levels when this “roll-over” happens, this complicates the volatility situation, especially when conflicting signals are running through the market.
But the essential point remains unchanged: we don’t need all of the excess oil supply to be taken from the market.
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