There are long-term cycles in the financial markets that we notice way after they have ended. I think we should appreciate the fact that we may be entering a new cycle in the oil market. What are the changes in fundamentals? What are the new main factors driving oil?
The main vector of this transition: the rise of US production. Shale industry has disrupted the “traditional” (or past-cycle) balance of the market. This led to the current oversupply and the sharp fall and rise in the oil price. The market is now looking for a new equilibrium.
We moved from a market that was kind of an oligopoly to a more competitive market. This fundamentally change what to expect from price and where to look at to anticipate changes.
- (1) Oil market: 2001-2014
- (2) Oil market: 2014-20xx
- (3) Where to look at – new oil price drivers?
(1) Oil Market 2001-2014
Price Action: A strong bull market with significant period of time with price above $100.The fundamentals were appealing: a strong demand growth and supply uncertainties.
Strong demand growth: China, BRICS
Supply uncertainties: Middle East wars, embargo, terrorism
Concerns about inventories and strategic supplies
- Big Players
“Swing producer”: Saoudi Arabia (strong bias towards higher prices)
- Market Sentiment
Common vision at that time: concern about supply disruption
(2) Oil market: 2014-20xx
Price Action: not a bull market anymore, big drop, range trading and hard to go back to the previous highs
Weak demand growth (China, India)
Production coming back to the market: Nigeria, Libya, Iran, Iraq:
Big recent increase in production: Russia, Mexico, US, Saoudi
Huge inventories (land & see) from an historical perspective
–> The oil market glut has just begun to ease.
- Swing Producers Saudi Arabia -> US
Saudi Arabia position
The refusal by Saudi Arabia in November 2014 to continue in the role of the world’s swing producer wasn’t a knee-jerk reaction to the slide in oil prices that had begun some five months earlier. It was a wholesale reassessment of how the oil market should work: No longer would the producers of cheap crude limit their supply in order to artificially raise the price. Here’s what erstwhile Saudi Oil Minister Ali Al-Naimi said in March 2015:
It is not the role of Saudi Arabia, or certain other OPEC nations, to subsidize higher-cost producers by ceding market share.
US is the new swing player
- Market Sentiment
Negative and now moderately positive
(3)Where to look at – new oil price drivers?
For new fundamental data: