Panicky Headlines

Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing.

Photo credit: Alamy

Today a friend pointed out to me two recently published articles; their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” – and proceeds to inform us about things everybody is presumably aware of by now, such as the fact that many oil producers keep producing all out in spite of the collapse in crude prices, because they have to service their debts. It supplies this helpful chart:

 A scary crude oil supply-demand chart – click to enlarge.

Reuters meanwhile writes: “Oil ends down more than 2 percent as U.S. drilling points to glut” – it’s basically the same story, with one expert supplying the following remark:

“The market is stuck in a relentless downtrend,” said Robin Bieber, a director at London brokerage PVM Oil Associates.

If you didn’t get it so far, you should get it by now at the latest.

However, crude oil is at a technically very interesting level: $40 was the high made in 1980, 35 years ago. The market has an elephantine memory when it comes to such chart points – they often turn into support – for no good reason as far as we can tell, except that they exist. In the 1970s, $10 was an equivalent chart point, which was reached again almost on the dot in 1998. At the time, the Economist published a cover story: “Drowning in Oil”. It marked a low in crude oil prices that hasn’t been seen again since.

The Economist cover story that appeared at the 1998/1999 low in crude oil prices

Why did the Economist believe that crude oil prices would fall by another 50% at the time? Because of what everybody knew – there was a huge glut. No-one could imagine that it might actually not matter.

Fundamental Data Are Not Enough

Having said all that, here are two interesting factoids: for one thing, the contango in crude oil futures is beginning to contract a bit of late. In fact, spot trades slightly above the front month future and the next two delivery months, which remain however in contango relative to each other:

Crude oil futures – the contango is beginning to shrink a little – click to enlarge.

For another thing, there is a double non-confirmation between crude oil prices and the Russian ruble. It could easily disappear – all it would take would be a little more ruble weakness – but in the past, such divergences have often proved to be a useful heads-up:

Crude oil and the Russian ruble – the lines show two non-confirmations between lows in the ruble and lows in crude – click to enlarge.

The thing is, commodities never make highs or lows based on the fundamental data everybody is aware of. What people are usually forgetting is this: the news may be very bad, and may indeed be about to get even worse. However, the question is always this: what does the current price discount? Is it perhaps already reflecting the even worse backdrop that is yet to come? If so, then prices can bottom many months before the fundamental backdrop actually improves.

This is why we look at technical data and the market structure – they can at least provide us with the occasional hints about market perceptions and psychology.

Conclusion

Given that WTI crude briefly fell below the $40 mark in the 2008 panic, we cannot rule out that it will do so again. Perhaps it will be Brent crude that will hold $40, as our friend inter alia suggested. However, given the increasingly hysterical press crude oil is getting and the fact that there are a few tentative signs that it may be close to at least a short to medium term low on technical grounds, one should begin to keep a close eye on it. Maybe it will surprise everybody again.

Charts and tables by: WSJ, BarChart