Oil

The story of oversupply has been the story of the oil industry. It has dominated market sentiment and kept prices in check. Indeed, some commentators are beginning to wonder if this weakness is now the new normal for crude oil.

The story of oversupply has been the story of the oil industry. It has dominated market sentiment and kept prices in check. Indeed, some commentators are beginning to wonder if this weakness is now the new normal for crude oil.

By mid 2017, a slide into bear market territory – with a drop of 20% for the WTI benchmark – highlighted just how far sentiment had turned, but this wasn’t news to viewers of Real Vision. Several months earlier, Raoul Pal, CEO and Founder of Real Vision, had set out his case for shorting the oil market in a special five part ‘Big Story’ series, highlighting it as a key trade for the year.

Raoul has a pretty good track record of making these kind of major macro calls: In May 2014 when oil dropped from $100 to $85, Raoul appeared on CNBC and said it was going to keep going down to $30. This shocked the market at the time, but around a year later, it did exactly that.

In 2017, oil came back onto Raoul’s radar because he spotted a seemingly repeat set of circumstances and a huge net long position on the other side, with many investors in the market anticipating a rise in oil prices. In fact, it was the biggest long position for any commodity in history – but Raoul was convinced the market was missing something.

He analyzed the huge waves of supply that were literally flooding the market with crude oil. In fact, it became a major theme for the Real Vision podcast, Adventures in Finance. They ran a special report, ‘Over the Barrel’, which examined the repercussions of a boom/bust energy cycle and the glut in supply caused by massive investment in oil industry infrastructure.

Raoul saw that US shale producers wanted to become a major force in the oil industry so were ramping up production at ever lower prices. Meanwhile, OPEC countries were agreeing production cuts, yet still exporting significant levels. And on top of all that, there was oil production coming from new sources like the Caribbean and Brazil. All these factors were pointing to oil moving lower.

Raoul’s investigations with market sources and energy market experts revealed that in order to keep the price of oil high, certain hedge funds were building up the major long positions in conjunction with the Saudi Arabia government. This unusual activity was explained both by the huge slide in Saudi’s foreign exchange reserves, which dropped below $50 billion for the first time and also potentially connected with the upcoming IPO of state energy giant Saudi Aramco. Clearly the Kingdom had much to gain from selling a stake in what would be the world’s largest IPO while oil prices were on the up.

But in the end, as Raoul predicted, oil did move lower amid a number of factors including higher than expected output from the shale wells of the Permian Basin and stockpiles around the world not drawing down as fast as the bulls had anticipated.

This move was followed by reports that some major hedge funds (who were betting on the price of oil rising) had taken a substantial hit to their profits and it turned out to be a bloodbath year for them while it’s easy to think that the changing face of the oil sector will be characterized by OPEC’s inability to control global production (with a greater influence on supply coming from non-OPEC sources, in particular the US and Canada), it seems the future for the commodity will actually be determined by technological developments – most notably electric cars, which of course point to much lower long term demand.

Longtime Real Vision commentator Diego Parrilla examined these factors in a fascinating recent interview about the shale revolution and the long term trend for oil heading lower.