You can count me in the camp that thinks crude is going to have a hard time staging a sustainable rally no matter what happens geopolitically, so let’s just get that out there up front.
There’s an absurd “up the down escalator” dynamic at play with U.S. production and as long as capital markets remain wide open thanks to the central bank-inspired hunt for yield, well then it’s hard to see a scenario where rising prices aren’t met with rising production, in a self-defeating loop.
Meanwhile, the production cuts have helped, but after a while, the whole “a sustained market rebalancing is just around the corner” meme gets tiresome, as does the headline hockey about who’s in and who’s not for the next extension. Citi’s Ed Morse weighed in late last month, suggesting that “forward guidance” by the Saudis with regard to cuts has “opened up the free-rider dilemma” in the past, and we could well see that again “albeit with fewer countries able to sustainably raise output this time.”
Whatever the case, WTI is at a 2-year high and it looks to me like it’s the most overbought since 2013:
Hedge funds net-longs on Brent hit record highs last week, while WTI positions are the highest since August.
Bloomberg’s Mark Cudmore isn’t optimistic about the outlook going forward. “Crude prices jumped at the open Monday on largely irrelevant news from Saudi Arabia,” he wrote overnight, adding that “it’s got the look of a classic head fake and may mark the final push higher before a correction.”
Cudmore’s note is a decent summary of all the global events that may be relevant for oil, but make no mistake, that news out of Saudi Arabia isn’t “irrelevant” for crude. In the near-term, MbS supports the production cuts and in the long-term, Vision 2030 is about diversifying the country away from dependence on oil. By definition, nothing that happens politically in Saudi Arabia can be “irrelevant” for oil prices, and this particular political shift is more consequential than usual.
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