Dueling Oil NarrativesInteresting article which sums up the various oil views
https://financialpost.com/investing/where-you-think-oil-prices-go-may-depend-what-stories-you-read
Where you think oil prices will go may depend on what stories you read
Martin Pelletier:
Published Oct 07, 2024
We are currently experiencing this with conflicting narratives around the future of oil.
It is not the only narrative investors have heard. Look at the hype around tech startups that resulted in the 1990s dotcom bubble that burst in the early 2000s. Or the peak oil supply story in the early 2000s wrongly indicating oil supply was declining. Or the when these narratives don’t materialize with the expected ending – it can end in ruin for those unable to get the timing on the exit right.
And if a narrative that turns out to be wrong gains momentum in the media, it can lead to major movement in a stock or even an entire segment of the market.
We seem to be in a moment like that with recent events in oil markets fuelling duelling narratives around China weakness, OPEC troubles, Mideast mayhem and the effects of all this on oil prices.
In late September, China announced a significant stimulus program, sending its stock market rocketing higher. Before this move had time to impact oil prices, on its heels came a Financial Times article, hinting at OPEC troubles and the cartel potentially abandoning its oil price targets.
This is problematic because one of the main stories that has been overhanging oil markets is economic weakness by China, which is being addressed with a bazooka-sized US$114 billion stimulus injection by the Chinese government. For some perspective on its magnitude, China’s total stimulus package is estimated to be about US$1.07 trillion this year, or equivalent to 6 per cent of the country’s GDP in 2024. And yet, it seems that suddenly this large component of the bear narrative no longer matters, with the focus once again being put on OPEC’s troubles.
Then, just one week later, Iran – one of the largest oil producers in the world – attacked Israel with 180 missiles and Israel responded by announcing it is considering attacks on Iranian oil rigs and nuclear sites. Oil prices moved higher but soon gave back all of those gains upon yet another OPEC-themed piece, this time by the Wall Street Journal. This article cited unnamed sources saying that Saudi Arabia warned oil prices will drop to US$50 a barrel if OPEC members do not stick to agreed-upon production cuts.
OPEC immediately responded on X, claiming this WSJ piece was “completely fabricated.” But it was too late as the damage was already done with algorithms quickly initiating a sell-off in global oil prices.
We took a look at whom these narratives might benefit. The current U.S. government has a lot to gain by keeping oil prices down, as it impacts consumers and affordability. There is an election coming up in a month and lower oil prices would be a huge benefit to the average voter.
Bjarne Schieldrop, chief commodities analyst at Swedish firm SEB Research, sums it up perfectly in the Telegraph when he says: “More Americans live from hand to mouth, on the margin. If they suddenly have an additional outlay for gasoline, they are extremely hurt. And you cannot take the bus there, you have to use your car. It will be negative for (presidential candidate Kamala) Harris.”
However, a wild card in all of this is that Israel really doesn’t care about the U.S. election, nor stories about OPEC.
Schieldrop continues: “The U.S. is unlikely to hold much sway on Israel’s next steps in the conflict. Israel is not listening to the U.S. whatsoever.”
This is the reality that a few brave speculators are waking up to, with some even betting on a return to $100 oil.
Leo Tolstoy, one of greatest and most influential authors of all time, famously said that “the two most powerful warriors are patience and time.” And so, while there may be a short-term influence from a certain narrative, over the longer-term there is a return to the truth and to underlying fundamentals.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.