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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Ignore The Hype: Oil Is Still In A Bear Market

Rig

Oil prices hit two-year-highs on Monday amid signs of continuously tightening markets and strong signals from Saudi Arabia and Russia that they are willing to extend their production cut deal beyond March 2018.

The sentiment in the oil market has not been this bullish in more than two years, with oil demand growth expected to be strong along with OPEC’s rhetoric that it would do “whatever it takes” to rebalance the oil market. Brent has been trading above $60 a barrel for several consecutive days and its futures curve has been in backwardation for months. WTI surpassed the $55 mark, and it, too, appears to be approaching backwardation—a sign of a tighter market.

Yet, we are only in the sixth year of a commodity bear super-cycle—which usually lasts 20 years on average, and “this oil bear has room to run”, Austin Pickle, Investment Strategy Analyst at Wells Fargo Investment Institute, said in a note last week.

We are currently stuck in the second stage of this super-cycle bear market, in which oil prices are range-bound and will remain so for years. According to Wells Fargo, WTI oil prices will stay stuck in the $30-60 a barrel range for another five to ten years—until the super-cycle bear market is over.

This means that WTI prices will likely have little upside now that they have hit the mid-$50s, Pickle says, adding that Wells Fargo is keeping its year-end 2018 target for WTI oil price at $40-$50.

Some investment banks have started warning that fear of the oil overhang will turn into fear of a supply crunch next year, and started to tentatively revise up oil price forecasts.

But Well Fargo’s Pickle leans on history for the super-cycle bear market analysis and warns that “we would caution investors to avoid getting too excited that the next bull market may be just around the corner.” Related: Aramco Board Targeted In Anti-Corruption Crackdown

The commodity super-cycle bear markets since 1800 have lasted typically around 20 years on average, but have shortened lately, Pickle says in his analysis. The last super-cycle bear market in oil was from 1983 to 1999, and the current bear market is almost perfectly following the previous cycle trend.

In the previous super bear market, after the 1986 oil price crash, it took the market more than 12 years to turn to the next super-cycle bull market.

“Luckily, we do not see this bear cycle lasting quite so long—our best guess is another 5– 10 years,” Pickle noted.

The strategist outlines the three distinct phases of the super-cycle bear market: thinning out the weakest players in the initial price crash; oil prices stuck in range-bound trade for years; and exasperation when many companies—fed up with thin profits in the lower-for-longer prices—close up shop and investors move to other opportunities.

Step one of the healing process toward the next super-cycle bull market is weeding out the weakest exploration and production companies—and we have passed this stage.

In North America, between the beginning of 2015 and end-July this year, a total of 128 oil and gas producers filed for bankruptcy, including 14 E&P firms in 2017, according to Haynes and Boone’s latest Oil Patch Bankruptcy Monitor. Related: 600,000 Bpd At Risk As Venezuela Delays The Inevitable

The second stage of the super-cycle bear market—in which we are currently stuck—is range-bound trade in oil prices lasting for years, as the companies that have survived the crash learn to live within their means.

“Money is no longer being thrown at every imaginable oil play, and only the most cost-effective oil producers remain. As a result, the remaining companies survive low oil prices for longer,” Wells Fargo’s Pickle said.

The market needs “peak exasperation” to turn around the bear super-cycle, according to the strategist.

While oil majors are preparing for lower-for-longer—and even “lower forever”—oil prices, warnings have been growing that an oil price spike is inevitable after 2020, due to years of underinvestment in exploration and new supply following the 2014 price rout.

“This lack of investment and interest in the space allows demand to overwhelm the potential supply response—and a bull market to be born. Unfortunately, we are not there yet. The shortest bear market on record, back to the year 1800, lasted 13 years. As of today, we are only in year six. This bear still has room to run,” Pickle notes.

Only time will tell if this will be the shortest super-cycle bear market in history, and how far this bear can run.

By Tsvetana Paraskova for Oilprice.com

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  • Disgruntled on November 06 2017 said:
    I am not the sharpest tool in the shed, but we are six years into a bear super cycle? Just a little over 3 years ago we were over $100/bbl. I would agree with 3 years into it, but six??

    Also, what is different now vs the 1986 bust (and I lived through every year of that one) is that the excess supply now is nothing like it was then. In 1986, there was somewhere around 15 mmbopd of excess global production capacity over demand. Demand in 1986 was about 59 mmbopd. So it took a long time to soak up that excess capacity. Today we are on the cusp of a 100 mmbopd (!!) demand, which we should hit by the end of 2018. There may be 2 mmbopd of excess capacity but much of that is Saudi Arabian sour crude for which there is not any market anyway.
    We cannot meet that demand figure, much less the 1.2 - 1.6 mmbopd/year increases that will follow over the next five to ten years, for $40 - $50/bbl. It will necessarily take much higher prices to not only incentivize the work it will take, but also to actually pay for the work it will take. The sweetest spots are being exploited right now. The lousier areas will take more $$/bbl to get that oil out of the ground. This bear market is coming to an end because it has to come to an end.
  • JACK MA on November 06 2017 said:
    Most folks don't listen to or believe this bank after their illegal and criminal activity concerning fake accounts. Maybe they have oil shorts that are bleeding about now? Oil is on the way to 200 priced in gold. IMHO
  • Paul on November 06 2017 said:
    As long as rigs are being taken offline in the US as oil prices rise, we can expect less oil to be available in the future and prices to be higher leading up to the next global recession. Rather than be at the mercy of foreign oil producers, American businesses, to some degree, benefit today from higher oil prices like no time in recent memory.

    It might be that American producers are moving alongside OPEC in curtailing investments with the intention of raising prices in the future - a global cartel of sorts.
  • mark on November 06 2017 said:
    What's different this time is OPEC cuts.
  • the masked avenger on November 06 2017 said:
    Hi oil will squash any economic growth and ramp up alternative energy. High oil killed the economy recentlt....ramo up price, the economy falls. Basic economics. You oil guys never learn, greed destroys growth. Have fun when oil is no longer king....soooooin.
  • Patrick on November 07 2017 said:
    There are many with short positions that are being demolished right now. Smart positions got out the last time WTI oil was at $45. Sentiment has shifted and banks like Wells Fargo are again behind everyone else in the race. The fact is that the lack of investment over the past 3 years and with demand rising, we are going to get an oil spike and have a supply deficit. What is terrible is that this is all caused by traders and speculators taking things to the extreme. No one can find a balance, it is either OMG we have too much oil! or OMG we don't have enough oil. There are always Bears, Bulls that are last to get on the train, even though there have been "All Aboard" calls for a long time. Here is another one.
  • Frank the Tank on November 07 2017 said:
    Exports from the US last week were higher than at any point in my lifetime. Imports from Saudi Arabia were at historic lows last week, down more than 50% from last year. The US glut stands essentially unchanged from last year.

    The only thing moving this market upward is Saudi manipulation with the help of their hedge fund friends in the US. Once the IPO fails and they sell 5% to China, crude will plummet.
  • ZIG on November 16 2017 said:
    WOW........I just saw the storage supply curve completely roll over in the last eight months, down 50 %...and he thinks we are going to be stuck in a range. Note Bakken is already topped as with others. This latest EIA report is completely suspect, I believe the EIA is off 300 of 400 B of Oil for the entire 2017. A downward storage curve will not flip anytime soon.

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