Oil won’t stay in a bear market

Oil was supposed to go to $100 per barrel. Bulls were too bullish. Now the oil price has dropped, bears are too bearish.

When I was in New York earlier this year, I made the customary visit to the Rockefeller Center.

Standing on the “Top of the Rock” overlooking the concrete jungle that is Manhattan, it feels like you’re on top of the world.

About a century ago, the Rock was on Top. John D. Rockefeller turned his company Standard Oil into the largest oil refinery in the world.

Before the US Supreme Court broke it up for being an illegal monopoly in 1911, Standard Oil was one of the world’s first multinationals.

The Rockefeller era was the heyday of American oil. As time wore on, the Middle East emerged as the biggest producer of black gold.

But the US has clawed its way back into the oil market. Thanks to shale producers, the US is once again the biggest oil producing country in the world.

Oil itself staged a comeback this year after years of glut. A couple of months ago, analysts predicted oil prices of $100 per barrel by the end of the year.

Since then, the oil price has dropped to $70. Bearish sentiment prevails again.

If analysts were too optimistic before, maybe they’re too pessimistic now?

More oil than ever

At the start of the century people expected oil to be on its way out by the year 2018.

We’d started making more fuel-efficient, hybrid and electric cars. At the same time, wind and solar energy were supposed to replace fossil energy.

Contrary to those expectations, oil reached a milestone last quarter.

For the first time in history, the world produced more than 100 million barrels of oil a day, according to the International Energy Agency (IEA).

This is all the more remarkable since it’s happened at a time when two large oil-producing countries are struggling to produce and sell their oil. Venezuela is in absolute chaos while Iran is plagued by US sanctions.

Other countries have evidently picked up the slack. The US, in particular, has increased its output a lot.

Ten years ago the US produced five million barrels per day (bpd). It’s now pumping a record 11.6 million bpd. Next year US crude production is expected to exceed 12 million bpd.

The US has reclaimed its crown as the world’s largest oil-producing nation. It’s back on top like in the Rockefeller days.

The country is closely followed by Russia, which produces over 11 million bpd, and Saudi Arabia, which extracts 10.5 million barrels from beneath the earth’s surface every day (and could ramp up production to 12 million bpd).

If global oil production has never been higher and prices have risen this year nonetheless, it can only be because demand keeps pace with supply.

Oil consumption in Europe hasn’t dropped by as much as anticipated. At the turn of the century, EU countries used up 14.6 barrels per day. Today it’s still 13.2 million bpd.

In the US, demand has slightly risen from 19.7 million to 19.9 million bpd since 2000.

But elsewhere demand for oil is still blowing up. Especially the two most populous countries in the world are contributing to rising demand.

Chinese oil consumption has shot up from 4.7 million bpd in 2000 to 12.8 million bpd. Over the same period, demand from India has increased from 2.3 million to 4.7 million bpd.

That’s why we may not see the oil price drop to $30 per barrel anytime soon, even though we’re pumping more oil than ever.

Oil could bounce back

After years of oil glut, bullish sentiment returned to the oil market this year.

A couple of months ago, analysts predicted oil prices of $100 per barrel by the end of the year.

Since then, the price of a barrel Brent crude oil has fallen below $70 again. West Texas Intermediate (WTI) crude now costs less than $60 a barrel.

Where oil announced an output record in October, oil set a negative record this week. US crude prices fell for an 11th consecutive session, which has never happened ever since the contract started trading.

Oil prices have dropped more than 20% from their October highs. It means oil is now officially in a bear market.

The word “bear” is enough to make people gloomy (or happy – if you want the price of oil to come down even further).

But there’s reason to believe oil prices won’t fall much further and may even bounce back up.

One clue is the Saudi Energy Minister openly speaking about a production cut. Reuters reports Saudi Arabia and its OPEC partners have discussed cutting production by a million barrels per day next year.

It’s also worth remembering that US sanctions on Iran may have curbed its output somewhat but not nearly by previously anticipated levels.

That’s because the US has granted waivers to some countries that allows them to keep importing their oil from Iran without risking the wrath of President Donald Trump.

If the White House decides to make it harder for Iran to sidestep US sanctions, output could take a big hit in the Islamic Republic.

OPEC production cuts and tougher sanctions on Iran could push the oil price back up.

At the same time, increased output in the US and Russia and falling global demand because of an economic slowdown may help keep a lid on surging oil prices.

“OPEC could hardly raise output now,” says Strategic Intelligence’s investment director David Stevenson.

“The key point about oil is the price. Since everyone was talking $100/barrel in September, crude has done exactly the opposite and crashed into a bear market.

“I haven’t turned optimistic on oil yet. But it’s looking a much better bet than when everyone else was bullish at $85/barrel.”

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