Raymond James' J. Marshall Adkins invoked one of President Trump's favorite phrases to explain oil's plunge, and to excuse his bullish bias (that crude can rise to as much as $65 a barrel).
As Bloomberg notes, conventional wisdom holds that resilient U.S. shale drilling, underwhelming progress towards OPEC’s goal in slimming global oil inventories, and output recoveries from nations exempt from the deal to curb production helped push crude down more than 20 percent from recent peaks. But according to Adkins – a noted oil bull – the bad times for oil can be chalked up to “fake news” that amplified the downside.
“The recent collapse in oil prices was triggered by a breakdown in the technical charts but fueled by the ‘negative feedback loop’ of bearish headlines that usually follow price declines,” the analysts wrote in a July 3 note to investors.
“Some oil price headlines have been misleading, or outright wrong, and they have distracted investors from what we believe is fundamentally a bullish overall picture.”
Concerns have been overblown, the Raymond James analysts argued, saying trends pertaining to U.S. inventories, production and gasoline demand have been misinterpreted. They put out a list of “myths” that explain the downturn and set out to debunk them in arguing that crude can rise about 45 percent from current levels.
The analysts neglect to bring up one of their own old calls: that West Texas Intermediate would touch $80 per barrel this year.
“While increasingly lonely in our bullish oil price view, we are still convinced that oil prices are on track to set cyclical highs over the next six to 12 months, and we encourage our readers to stay focused on the real fundamentals and not get caught up in the day-to-day torrent of noise,” the analysts conclude.
So with all that said, it appears that uber oil guru and perma-bull Andy Hall of Astenbeck Capital has "fallen" for this "fake news" as he has finally changed his mind on the general direction of oil prices.
Since the beginning of 2015, when oil prices first started to slide, Hall’s belief that the decline is only temporary has been unwavering, and as other oil bulls have thrown in the towel, Hall has continued to try to justify his bullish stance.
However, as ValueWalk's Rupert Hargreaves notes, it now looks as if Hall has become the latest oil bull to capitulate. In a July 3rd letter to investors of Hall’s oil-focused hedge fund, Astenbeck Capital, a copy of which has been reviewed by ValueWalk, the fund manager strikes a downbeat note and seems to finally admit that OPEC is no longer in control of the market and shale’s dominance now means $50 oil is the new normal.
Hall starts his letter by acknowledging that oil fundamentals have only deteriorated over the past six months as “demand growth seems to be somewhat less than anticipated while supply keeps surprising to the upside.” Meanwhile, “the expected acceleration in inventory drawdowns has not materialized – at least as evidenced by available high-frequency data.”
There are two main driving forces behind these fundamental changes, one long-term, the other short-term.
The long-term factor is “it is becoming increasingly evident that, under most reasonable scenarios, U.S. shale oil will be the marginal source of supply, at least until 2020” Hall writes. The most significant contributor to this is that the “cost of this oil is significantly lower than was believed to be the case even a few months ago,” and as a result “the long-term price anchor for oil has moved lower.” According to Hall’s letter, the price anchor has now fallen to $50 a barrel, down from $60 at the start of the year. Specifically, Hall writes:
“Technological advances have continued to drive down well breakevens as well as expand the shale oil resource base in the U.S. In a recent report, PIRA estimated that there are now 80 billion barrels, or half of the recoverable U.S. shale oil resource base, that is economic at $50 Brent (say $48 WTI) or less. This represents some 215,000 well locations. Each of these on average can produce around 300 bpd in its first year on stream. The current horizontal oil rig count is 650 and has been growing at a rate that would bring the count to close to 800 by the end of the year. 800 rigs can drill about 15,000 wells per annum which means potentially 4.5 million bpd of gross new production.
A recent Goldman Sachs analysis posits continued productivity growth for years ahead. This will be driven by higher rates of recovery of initial oil in place through the application of artificial intelligence and big data analytics. Goldman argues that this could eventually reduce breakevens to $45 and below. The best operators in the Permian like EOG already have well breakevens at, or even below, $40 WTI. As the rest of the pack catches up with the leaders, average breakevens are likely to fall further if Goldman is correct.”
The second, short-term factor is an apparent deterioration in the supply and demand balances for 2017. While many analysts were expecting OPEC’s actions to curb supply to reduce the inventory overhang, the expected supply deficit has not materialized. Hall writes that based demand in 2017 should be growing by around 1.7 million bpd, if not more. Actual growth, however, “seems to be closer to 1.4 to 1.5 million bpd for reasons that are not yet clear.” As demand comes in lower than expected, supply is building faster than expected with growth in non-OPEC supply revised progressively higher by 0.3 million bpd and OPEC additional supply increasing by 0.2 million bpd.
“Together,” Hall reports “these changes amount to a 0.9 million bpd deterioration in the supply and demand balance for 2017 and an initially expected supply shortfall for the year of 1.4 million bpd now looks like it will be closer to 0.5 million bpd.”
These figures are before shale contributions. “At the rate at which oil drilling rigs have been added in the U.S., non-OPEC production has been on a path to grow by as much as 2 million bpd in 2018.”
Thanks to all of the above-mentioned factors, Astenbeck Capital Management, now giving up on his long-term bullish oil for oil prices. Instead, it seems as if the trader is going back to his roots, adopting a short-term strategy to profit from volatility.
“These developments call for a more opportunistic approach to the oil market than hitherto. Whereas it once seemed positions could be held with an eye to a longer-term secular appreciation, that is no longer the case. Indeed, the evidence is now in plain sight. Over the past year, the front month WTI futures contract has moved by double digits in percentage terms 10 times within a $40 – $55 band. This volatility has been accentuated by large financial flows into and out of the market by non-traditional investors and algorithmic trading systems. Attempting to capture just a percentage of those moves makes more sense than trying to ride what has turned out to be a non-existent trend, especially when contango inflicts a negative roll return on investors. The extreme volatility within a rangebound environment also argues for a more tactical and conservative approach to portfolio management.”
“At the start of the year, the anchor was thought to be about $60 [for Brent] and rising over time… Today, it appears to be closer to $50 (and possibly still falling.)"
So is 'fake news' the new 'dog ate my homework?'