OIL: A SLIPPERY SLOPE Crude Oil has suffered an epic collapse. From mid-October to


mid-November it has lost a quarter of its value from a 52-week high. This fall, in terms of speed, is up there with the greatest in its history. By mid-November the RSI (relative strength indicator) of Crude had fallen to its lowest level since the inception of futures contracts, in 1983.


Perhaps oil is the greatest momentum asset of all. When Brent Oil hit over $85 in February, pretty much every analyst was calling for $100 oil once more. There was plenty of fundamental news flow to back their bullishness up, including Iran sanctions and lack of Saudi capacity to increase output, but it was bell ringing time.


As the dollar rallied and dire emerging market dollar debt came into analytical view, various global equity markets started to fracture and collapse. Argentina, Turkey and most importantly India and China, all major consumers of oil, were suddenly showing weak growth. Fundamentals were ‘trumping’ momentum.


Seasonality in real life, to you and me, is often simply down to the weather. Leaves on the ground and trying to grab a last bit of sun as nights draw in. In the oil market it is actually very similar. Once the summer is over, in the US the driving season inevitably ends. At the same time, we often witness several hurricanes closing in (which means you cannot sell oil on the driving season alone). However, once the hurricane news is realised and understood, moving from potential to reality, and most often contained, the seasonality can take hold.


This year, as oil inventories started to build and refineries needed less to process into products – yes, it really is that easy- the oil price started to slip. At the same time, we had increased supply from Russia, US shale had decided the higher prices were a good time to increase production again and US crude oil production was rising at the fastest rate on record. The numbers were blatant.


According to US Energy Information Administration (EIA) Crude Oil production hit a record of 11.35 million barrels per day (mbpd) in August, up from 10.93 mbpd in July. Crude output has increased by more than 2 mbpd over the past year, roughly 20%, which is unparalleled. Most of the increase, as mentioned, comes from onshore shale fields, where output has risen by more than 1.9 mbpd over the past year.


To balance this increase, the market believed that US sanctions on Iran were going to cause global supply to fall to the extent of Iran’s entire output of 2.5 mbpd. If Trump stopped Iran from exporting oil, the U.S. shale industry would conveniently be able to fill the gap precisely. However, importers of Iran’s oil, being China, Turkey, India and Europe, said they would still do business with them, in fact most of Iran’s clients have now been exempted from the sanctions altogether. Iran’s lack of supply never happened.


With Saudi also hitting near record production, the supply/demand balance was starting to look rather nonsensical. And whenever you see ‘nonsensical’ President Trump is not far behind, congratulating himself on getting oil prices down for the consumer’s benefit.


OPEC will try to exert control on production but the combined force of Russia, USA and Saudi control more output than the rest of the 15 OPEC members together. It is estimated that Saudi needs oil at $73 to balance its books. Russia seems to have little intent on cutting production, despite Putin being keen to maintain his new relationship with Saudi Crown Prince Mohammed Bin Salman. It is hard to know what the US’s relationship is with Saudi now. Trump is a big friend of ‘MBS’ while at the same time sanctions in the wake of dissident journalist Jamal Khashoggis murder are rife.


8 | ADMISI - The Ghost In The Machine | November/December 2018


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