In the oil markets today there’s a lot to talk about, almost too much. I have never seen such a disarray of geopolitical influences on the oil market at any other point in my 25-year career and it comes at a time when financial influences are similarly changing quickly.
Stay with me for a moment, because the only way I can get you to understand what’s happening in oil, now and in the future, is to get a little wonky on you and take you into my world of financial and not fundamental oil. I outlined my career thesis on the oil markets in my 2011 book “Oil’s Endless Bid” but the most important point I made was that financial inputs into oil markets have been more critical to understand than even the most basic fundamental challenges of supply and demand. That remains even truer today than in 2014.
Here’s what I mean: I could not, in perhaps even my wildest dreams, imagine an oil market that is under more geopolitical risk than it is today: The Saudis are ever suspicious of the Iranians, with oil their only political lever; Iran cannot find a nuclear agreement that satisfies them and sanctions are again a looming possibility; Syria still smolders; The Russians have seen a commercial jet shot down in disputed airspace with an ex-Republic that controls virtually all of the EU’s energy supply; Libya’s oil supply is dependent on who’s controlling the ports this week and Israel saw the need to again put boots on the ground in Gaza.
Shouldn’t oil be pushing…
In the oil markets today there’s a lot to talk about, almost too much. I have never seen such a disarray of geopolitical influences on the oil market at any other point in my 25-year career and it comes at a time when financial influences are similarly changing quickly.
Stay with me for a moment, because the only way I can get you to understand what’s happening in oil, now and in the future, is to get a little wonky on you and take you into my world of financial and not fundamental oil. I outlined my career thesis on the oil markets in my 2011 book “Oil’s Endless Bid” but the most important point I made was that financial inputs into oil markets have been more critical to understand than even the most basic fundamental challenges of supply and demand. That remains even truer today than in 2014.
Here’s what I mean: I could not, in perhaps even my wildest dreams, imagine an oil market that is under more geopolitical risk than it is today: The Saudis are ever suspicious of the Iranians, with oil their only political lever; Iran cannot find a nuclear agreement that satisfies them and sanctions are again a looming possibility; Syria still smolders; The Russians have seen a commercial jet shot down in disputed airspace with an ex-Republic that controls virtually all of the EU’s energy supply; Libya’s oil supply is dependent on who’s controlling the ports this week and Israel saw the need to again put boots on the ground in Gaza.
Shouldn’t oil be pushing much higher than it is right now? Shouldn’t we be seeing $120, $130 or even $150 barrel oil with so much of the world supply at risk?
The truth is, if not for the financial inputs into the oil market, we probably would.
But many of those financial inputs have changed since I wrote my book almost 4 years ago. No longer are the US investment banks the driving influence in the trade of financial oil the way they once were – almost every US bank has either sold their commodity desks or sharply curtailed them. With that loss has come a slowing of commercial oil traders that the banks courted and relied upon and added sharply to the ‘bid price’ that financial oil developed. Now that financial oil is overrun by large hedge funds, black box algorithms, independent marketers and conglomerate physical players like Glencore and Vitol, so much of the independent trade that supported oil prices is for the most part, gone.
What has replaced it is a series of articles that I could write, but one aspect of that loss has been the homogenization of oil trade – You will find that most of the big players in oil now are aligned on one side of the trade more often than ever before in my career. Today, for example, because of the litany of geopolitical risks I quickly outlined, almost every speculative barrel is being held in ‘long’ hands – according to the last Commitment of Traders report I read, the percentage of speculative short holdings is a historically low 3%. Think on that – 3%.
Everyone’s long.
What will make a market finally react to these enormous geopolitical and fundamental risks to oil? What can make a market rally – even though everyone is already long?
Only two things: More longs, or a shakeout of old longs.
The markets tried number two a few weeks ago – and failed. Downside truly is limited here.
But number one – that one is, I believe, on the way. This market is about to attract more longs, mostly more commercial longs but also more speculative buyers.
Because those geopolitical risks and fundamental shortages I speak of are real – and getting worse.
Here’s the bottom line: Oil is destined to be range-bound until after Labor Day. Truly, the only reason oil stays here, under $110, is because all the money is out on the beach in the Hamptons. I swear, it’s almost as simple as that.
But the advantage is yours then, slaving away in the hot city – now’s the time to ready yourself for a major rally in oil come the fall.
When the money returns – and old longs start to add to positions while new longs realize how cheap oil is right now.
I keep saying it – buy back month oil futures. And bet on another rally. A very big one.
