Barron’s is out this morning with a bullish oil thesis based on the analysis of Citigroup’s senior energy analyst, Eric Lee. Lee appears to have been an oil bear since $100, and is now making the case for a short-term rally to $60. The case is straightforward:
- Traders overreacted to the late 2016 OPEC production cut deal, building record long open positions
- The OPEC deal was easily gamed by allowing producers to aggressively ramp production up until the agreed upon production cut date
- Traders overreacted to shale the shale production ramp that temporarily exacerbated investory positions
- Global oil stocks began declining after 1Q17, and should accelerate thru YE
- Oil market positioning is such that the price of oil should finally begin to track bullish inventory data
Lee’s bullish oil case is corroborated by NDR’s energy strategist, Warren Pies. Pies utilizes a similar inventory model to track oil market fundamentals, but with a slight tweak: He looks at US petroleum inventories in order to gauge the supply/demand picture of the total energy supply chain. And while he has been wrong YTD on the price of oil, his conclusion that the fundamentals of the oil market are bullishly positioned for the medium-term is directly in line with Lee’s note that late 2016/early 2017 oil bulls were not wrong, but simply early.
Three charts from Warren Pies’ Twitter account: Oil market sentiment (and NDR gauge), managed money short positions, and the latest US petroleum inventory report.
Electrification of the auto market is likely THE number one risk to long-term oil demand; but the path from A to B will be long and winding. In that vein, within the context of the above-outlined bullish oil market construct my guess is that Volvo’s announcement of its intention to become fully electric/hybrid was a classic washout bottoming signal.