Last week, oil prices enjoyed a nice rally OPEC+ agreed to keep its current production agreement in place, maintaining the 400K bbl/day hike scheduled for October. The group took less than an hour to make its announcement this time around, a stark contrast to the lengthy negotiations at previous talks. Later on Friday, WTI slipped just below this level, but the catalysts are there to bring it back.
The markets have taken this to signal that global oil markets are in better shape than earlier feared, with the delta variant of Covid-19 causing widespread lockdowns and fears of another recession.
However, the rally has been rather weak, and WTI has been struggling to stay above $70 and facing heavy resistance around $71/bbl. Here are 3 bearish catalysts that could limit the oil price rally.
#1. Bearish Technicals
With fall knocking on the door, calls for $75-$80/barrel oil in the summer are now looking highly unlikely. Indeed, the bulls can't seem to catch a proper break, with WTI facing severe resistance around the $$70-$72/barrel zone.
Standard Chartered Global Research has described the current oil price cycle as a 'skimming stones' period of trading.
The research outfit notes that the broad pattern over the past three months has been one of sub-cycles of rallies from starting points below USD 68/bbl for Brent, followed by
reversals. Unfortunately for the bulls, the cycles have been getting flatter and faster, with Stanchart saying the next move is likely to be to the downside.
According to Stanchart, the first skimming stones sub-cycle started in late May, culminating in a Brent high of $77.84/bbl six weeks later. The next sub-cycle started below $68/bbl on 20 July with a high of $76.38/bbl two weeks later.
The latest and current sub-cycle started on 9 August with a high of $71.90/bbl reached just three days later.
On the charts, this pattern looks like skimming stones with each bounce less high than the previous one and the length between bounces gradually diminishing.
Stanchart has predicted that the end of the skimming stones phase will involve a period of consolidation followed by a breakout move towards the downside.
The research firm notes that the recent crude oil trading has not been range-bound, with zero inside days recorded for Brent since July 2. An inside day is a trading day whereby an intra-day high lower than the previous day's high as well as an intra-day low higher than the previous day's low are recorded. Indeed, only three such days have been recorded over the previous 4-month stretch, a sharp contrast to the more volatile trading period of late-March and early April when there were seven inside days in just 17 trading days.
Stanchart says that whereas the possibility of the oil markets returning to range-bound conditions remains, the current momentum in fundamentals, particularly the spreading delta variant, makes an eventual downside breakout more likely.
Recently, we reported that Wall Street remains largely bullish on the oil price trajectory despite the pandemic and an uninspiring near-term demand outlook.
Indeed, Goldman Sachs has slightly downgraded its oil price outlook to $75/bbl in the summer, down from its previous outlook of $80/bbl, while Bank of America commodities strategist Francisco Blanch says he sees a case for $100 a barrel oil in 2022 as the world begins facing an oil supply crunch.
However, the Stanchart researchers have strongly refuted those bullish positions saying that WTI price of $65/bbl or lower is more likely than $75/bbl or higher. Stanchart says its bearish view is informed by the fact that "...a significant amount of money has already
entered the market in the Wall Street-generated belief (mistaken according to our
analysis) that the balances are much tighter and justify USD 80-100/bbl."
#2. Shale Comeback
Last month, the Biden administration urged the OPEC producers to raise production to ease rising gasoline prices which it views as a threat to full economic recovery.
But maybe Biden won't have to look beyond his own backyard for more oil production.
Velandera Energy's Manish Raj has told MarketWatch that U.S. oil production has been slowly "creeping up and is now 300K bbl/day higher from the beginning of the year."
In its latest report, the International Energy Agency (IEA) has predicted that we could start to see a strong comeback by U.S. shale, with supply from non-OPEC producers expected to rise by 1.7 mb/d in 2022, with the US accounting for 60% of the growth.
But some experts are now warning that a full shale comeback might not be a good thing for the markets.
According to an analysis by the authoritative Oxford Institute for Energy Studies, rising oil prices could allow for a significant return of US shale to the market in 2022, potentially upsetting the delicate rebalancing of the global oil market.
"As we enter 2022, the US shale response becomes a major source of uncertainty amid an uneven recovery across shale plays and players alike. As in previous cycles, US shale will remain a key factor shaping market outcomes," Institute Director Bassam Fattouh and analyst Andreas Economou have said.
Fattouh and Economou have warned that the market could flip into a surplus by the fourth quarter of 2022 if US shale growth hits the upper bound of 1.22 million barrels per day and global demand recovery turns out to be slower than expected.
What we find alarming about the Oxford report is that it might only take a partial recovery by the US shale industry for the effects of the extra oil to start being felt.
#3. ESG Drive/Net-Zero Economy
Environmental, Social, and Governance (ESG) investing is rapidly becoming one of the biggest megatrends in the investing universe. The pressure of ESG is being acutely felt throughout the U.S. oil and gas value chain, with ESG shifting from a nice-to-have feature to a must-have pre-requisite. In fact, ESG is greatly influencing the way investors invest in oil and gas, and may ultimately determine winners and losers in the market going forward.
Clark Williams-Derry, energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), recently told CNBC that there's a "tremendous degree" of investor skepticism regarding the business models of oil and gas firms, thanks to the deepening climate crisis and the urgent need to pivot away from fossil fuels. Indeed, Williams-Derry says the market kind of likes it when oil companies shrink and aren't going all out into new production but instead use the extra cash generated from improved commodity prices to pay down debt and reward investors.
Last year, New York City's Mayor Bill de Blasio and Comptroller Scott M. Stringer sent shockwaves through the oil and gas sector after they announced that the city's $226B pension fund plans to divest the majority of its fossil fuel investments over the next five years and also cut ties with other companies that have been contributing to global warming.
Rockefeller Brothers Fund, a family foundation built on one of the world's biggest oil fortunes, followed suit by announcing that it would ditch its oil and gas investments and cease making any new investments going forward. The $5-billion foundation was initially carved from oil money in the 19th century by John D. Rockefeller's son of Standard Oil fame.
More alarmingly, BlackRock Inc.(NYSE:BLK) CEO Larry Fink said his firm would begin to pressure companies to do a lot more to lower their carbon emissions by leveraging the massive weight of his mammoth asset base. BlackRock is the world's largest asset manager, with $9.5 trillion in assets under management (AUM).
Back in 2019, BlackRock CEO Larry Fink declared its intention to increase its ESG investments more than tenfold from $90 billion to a trillion dollars in the space of a decade.
But now, Fink has pushed out the goalposts on climate action and wants companies that he invests in to disclose how they plan to achieve a net-zero economy, which he has defined as eliminating net greenhouse gas emissions by 2050. BlackRock plans to put oil and gas companies under the clamps by creating a "temperature alignment metric" for both its public equity and bond funds with explicit temperature alignment goals, including products aligned to a net-zero pathway.
And make no mistake about it: With nearly $9 trillion of investments under its watch, BlackRock can certainly throw its weight around. Indeed, last year, the firm voted against 69 companies and 64 company directors for climate-related reasons while placing another 191 companies on watch.
With the fossil fuel sector deeply out of favor, oil and gas stocks are trading at absurdly cheap valuations.
By Alex Kimani for Oilprice.com
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