Welcome to the "just the start of the bull trend" edition of Oil Markets Daily!
True conviction investing requires you to stand your ground even when people disparage your thesis and call you stupid. We can confidently say we did just that throughout 2017.
What made us feel even more vindicated with this latest rally is not that we merely stuck to our higher oil price call because we were emotionally and psychologically bound by it, but because we actually found the market's bearish narrative more and more profoundly delusional.
For HFIR readers and HFI Research subscribers, we hammered away one bullish thesis one after another throughout 2017. In June, we gave Seeking Alpha an interview that we saw Brent hitting $65 by year-end. It's now at $64/bbl for those keeping track.
Was that merely lucky?
Over the summer, we started giving out US crude storage draw expectations. Increasingly, we saw our storage estimates turn more and more bullish. Now, we see nearly 50 million bbls of crude storage decline in November and December.
But what about US shale?
We stood out from the crowd reiterating our stance that the growth in shale oil production was vastly overstated. Throughout August, that was the only topicwe wrote about in our OMD.
And, while our research kept leading us to the same conclusion again and again, we were beyond frustrated by the market inaction or unwillingness to listen. We said repeatedly in our dailies that it wasn't the lack of IQ that has befuddled the market, but pure complacency. And as ironic as this may sound, complacency is still aplenty.
All of this led us to release this piece, "Perfect Storm - Oil Prices Will Rise."
So, again we ask, is this luck?
The start of the bull trend...
If you are staring at this oil rally today and wondering to yourself if we are at the top of the range in this near-term trading cycle, or if CFTC money manager positions are getting overly long in the tooth - you still don't get it.
What's happened over the last 10 months is not just so oil prices can pop from $50 to $57. No, it's the start of a multi-year bull trend.
The makings of all great commodity bull cycles start with the belief that prices will never rise, but keen market observers will realize that the golden rule in commodity has never changed - "Lower prices cure lower prices."
Capital expenditures in the oil upstream sector have decreased massively over the last three years. Non-OPEC conventional production is already starting to accelerate to the downside. The last three years of terrible oil prices have collapsed countries like Venezuela. Yet, the amount of time spent on Wall Street trying to figure out just how many thousands of barrels US shale will grow is hilarious and delirious.
The real bull thesis is just starting - it's the fact that for the last three years, the amount of neglect that has gone into these non-OPEC conventional production is finally starting to show. It doesn't matter if US shale gets all the external capital in the world, the producers won't be able to drill nearly fast enough to replace the supply cliff fall that's coming starting in 2019.
What bothered us even more during the last several months was the acknowledgement from the sellside that, "Yes, indeed the global supply side will come under pressure, but US shale will grow and replace the decline till 2020, so oil should stay at $50/bbl."
Are you kidding me?
Is the market really that stupid? If there is indeed a supply cliff coming, will prices really just stay at $50/bbl?
We found this argument delusional, and why even the best bear oil thesis never stood up to any sound logical reasoning test. It's not that we are arrogant, it's that we've failed to understand the logic. That's also why we wanted to explore the similarities to 2014, and surprise, no one expected oil to fall below $90/bbl despite forecasting US shale pushing the market into oversupply (see here).
As we wrote on Friday in our Sentiment Follows Price piece, if it's still not obvious to you that the bear thesis that gripped the oil markets in 2017 was downright delusional, then you just need even higher oil prices (than today) to slap some reality into you.
This is the start of a multi-year bull trend. Buckle up, and enjoy the ride.
Thanks for reading our OMD. If you want contrarian analysis on the oil markets, then you should think about signing up for HFI Research. We publish a weekly flagship report that dives into topics seldom discussed by the public. Come and see for yourself today! Sign-up here!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.