Crude Fundamentals Bearish Despite Noise

November 28, 2017 11:44 AM
Despite recent natural disasters and a spike in geopolitical concerns, the crude market remains deliciously ripe for the right short.

Atlantic Hurricanes, Mexican earthquakes, North Korean missiles, OPEC cuts production and adheres to it; all with the heating season on the way. It seems that there are multiple reasons—any one of which would do — to expect a major upward spike in crude oil prices.

Oil bulls never seem to tire of reasons to buy the black gold. But as bulls dream of the glory days of $100 per-barrel oil, the reality is that oil prices are probably breathing a last bullish gasp in what is looking like a languishing bear market. In fact, they could even see a precipitous fall long before Santa Claus starts fueling up the backup tank in the sleigh.

It is bullish enthusiasm however, that is presenting potentially lucrative opportunities for call sellers in oil. Traders may want to consider such opportunities for premium capture in your portfolio.

Media Hype: Hurricane Outages
The recent media coverage of Hurricanes Harvey, Irma and Maria has continued to keep crude prices in the news. As we noted during the crises, the initial refinery outages in Texas brought a spike in gasoline prices and a bottleneck in crude supplies. With refineries now coming back online, crude prices are now bouncing a little. The hurricanes did not damage Gulf of Mexico rigs (the U.S. crude supply is much less dependent on Gulf rigs these days anyway) and should not be a threat to oil supply. Thus the recent blip in oil prices does not change an otherwise fundamentally bearish picture in crude oil.

Crude oil’s August blip above $50 per barrel brought out the bulls one more time with reasons the market should go higher. Cited were driving demand, falling inventories, OPEC cuts, even North Korean blustering.

Perhaps all played a role in the late summer strength. Media, of course, likes to hype the ones that make good stories, even when the stories have little relevance to the longer-term price of oil. For instance, one network analyst cited “dwindling crude inventories” as the reason for the rally. It’s possible inventory reports brought in a few buyers, but it is summer demand season. Inventories are supposed to fall this time of year. The real science comes from putting draw and supply numbers into context.  It’s from taking these kinds of facts out of context where those that trade off the “news” can be misled.

The facts are that inventory draws are larger than last year. Supplies are lower than last year. But 2016 experienced never-before-seen levels of excess crude supply; 2017 numbers remain near those record supply levels. Current U.S. crude inventories sit at 466.49 million barrels. This is approximately 5.3% below last year’s record levels at this time of year.

But current crude supplies remain nearly 22% above the five-year average for this time of year. Supply may be lower than last year, but it still  can be classified as a glut. And that is heading into a particularly precarious time of year for oil prices.

You read about the “dwindling inventories” myth here a couple months back. I’m publishing it again here now because you’ll still see it used by some analysts to support their bullish case (and likely positions) in the crude market. Now you’ll know all the facts.

Media continues to pump the OPEC story as a possible catalyst for oil prices. The hard fact is that the OPEC oil production cut is not having its desired effect of reducing supply. OPEC ramped up production to record levels prior to the cuts, making it a non-starter to begin with. However, they only addressed the production levels. Export levels from OPEC nations reached a record level in July at 26.11 million barrels-per-day (bpd) – continuing to add to the global oil glut.

Should prices continue to sink lower this fall, OPEC cheating on quotas will intensify from already troublesome levels – especially from nations such as Iran. Thus, an already troublesome supply situation could begin to feed on itself, much like it did in 2016 prior to cuts.

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About the Author

James Cordier is the founder of, an investment firm specializing in writing commodities options for high net-worth investors. He is the author of The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014).