OIL: It's a Secular rally, Not Cyclical
Two key points highlighted on the chart:
The first, never forget the distinction between an event or outcome that 'probably' won't happen, vs one that 'possibly' could happen!! The lesson of the NEGATIVE PRICED OIL during the start of the Covid crisis should never be forgotten. The idea that oil storage would be at full capacity and that 'longs' in the oil market would be willing to PAY someone to take them out of the risk of delivery, while always possible, was never taken as a serious possibility!
Any 'black swan' event could result in the same phenomenon that plagued the oil markets back then...too much oil and nowhere to go with it! Right now, a repeat of this does not appear to be a "probable" outcome, but for sure, it remains "possible".
That said, the more relevant point on the chart for now is the explosive rally that we've already seen in Crude Oil. As the chart notes, it's risen close to 200% since the normalized levels post the negative crash. On a day to day basis, news headlines about 'demand destruction' and 'recession fears' etc, all under the canopy of 'cyclical' analysis, drives oil prices on the margin. But a deeper dive into the fundamentals of the oil supply/demand balance globally screams of a massive IMBALANCE!! For years, wells in Latin America and the Middle East, in particular, have been starved from the necessary maintenance and upkeep that is required to keep them functioning well (no pun intended). When our politicians in DC see the headline from earlier today about a massive profit by Saudi Aramco, there will surely be fiery soundbites from interviews calling for OPEC+ to increase production in order to bring prices down. The problem? They can't!! Couple that with the US focus on 'greening' the global, and we have a US oil industry that is not exploring and producing nearly as much as is needed to meet a burgeoning global demand for fuel as emerging countries truly have emerging middle classes that are, in fact, new sources of permanent demand!
I have been, and expect to remain long oil as a core position. Tactical trades in and around that core long will be driven by the 'cyclical' market focus. But the secular theme prevails! This is a case where we can't let the trees get in the way of seeing the forest.
DISCLAIMER: Comments are NOT investment or trading advice! They are solely for education and entertainment purposes.
The first, never forget the distinction between an event or outcome that 'probably' won't happen, vs one that 'possibly' could happen!! The lesson of the NEGATIVE PRICED OIL during the start of the Covid crisis should never be forgotten. The idea that oil storage would be at full capacity and that 'longs' in the oil market would be willing to PAY someone to take them out of the risk of delivery, while always possible, was never taken as a serious possibility!
Any 'black swan' event could result in the same phenomenon that plagued the oil markets back then...too much oil and nowhere to go with it! Right now, a repeat of this does not appear to be a "probable" outcome, but for sure, it remains "possible".
That said, the more relevant point on the chart for now is the explosive rally that we've already seen in Crude Oil. As the chart notes, it's risen close to 200% since the normalized levels post the negative crash. On a day to day basis, news headlines about 'demand destruction' and 'recession fears' etc, all under the canopy of 'cyclical' analysis, drives oil prices on the margin. But a deeper dive into the fundamentals of the oil supply/demand balance globally screams of a massive IMBALANCE!! For years, wells in Latin America and the Middle East, in particular, have been starved from the necessary maintenance and upkeep that is required to keep them functioning well (no pun intended). When our politicians in DC see the headline from earlier today about a massive profit by Saudi Aramco, there will surely be fiery soundbites from interviews calling for OPEC+ to increase production in order to bring prices down. The problem? They can't!! Couple that with the US focus on 'greening' the global, and we have a US oil industry that is not exploring and producing nearly as much as is needed to meet a burgeoning global demand for fuel as emerging countries truly have emerging middle classes that are, in fact, new sources of permanent demand!
I have been, and expect to remain long oil as a core position. Tactical trades in and around that core long will be driven by the 'cyclical' market focus. But the secular theme prevails! This is a case where we can't let the trees get in the way of seeing the forest.
DISCLAIMER: Comments are NOT investment or trading advice! They are solely for education and entertainment purposes.
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