After around forty years of making a living from financial markets in one way or another, I am not often left scratching my head these days. I may not agree with every move, but I can usually see the logic behind them. This week's big drop in oil prices, on the other hand, mystifies me. I can, I suppose, see that it was a "buy the rumor, sell the fact" kind of thing, but the timing of the move and its complete disregard of news that positively impacts fundamental factors was a bit puzzling.
After two months that saw crude jump around twenty percent, a pullback was coming at some point, almost no matter what. That is why I wrote here three weeks ago that I was beginning to trim some positions in oil stocks, not because I expected a collapse or anything, but just because it was time to take some profit, knowing that I could buy back in if oil did pull back for technical rather than fundamental reasons.
When that pullback started as the OPEC+ meeting approached, I began to get a bit nervous. Did the market know something I didn't? Had there been massive behind the scenes pressure from Biden and European leaders who were suffering politically because of rising energy costs? Were we about to see another easing of output restrictions?
The answers were no, no, and no but that didn't seem to matter.
One gets the feeling that, far from feeling pressure as a result of the discomfort of Biden, Johnson et al, the primary drivers of OPEC+ decisions, the Saudis…
After around forty years of making a living from financial markets in one way or another, I am not often left scratching my head these days. I may not agree with every move, but I can usually see the logic behind them. This week's big drop in oil prices, on the other hand, mystifies me. I can, I suppose, see that it was a "buy the rumor, sell the fact" kind of thing, but the timing of the move and its complete disregard of news that positively impacts fundamental factors was a bit puzzling.
After two months that saw crude jump around twenty percent, a pullback was coming at some point, almost no matter what. That is why I wrote here three weeks ago that I was beginning to trim some positions in oil stocks, not because I expected a collapse or anything, but just because it was time to take some profit, knowing that I could buy back in if oil did pull back for technical rather than fundamental reasons.
When that pullback started as the OPEC+ meeting approached, I began to get a bit nervous. Did the market know something I didn't? Had there been massive behind the scenes pressure from Biden and European leaders who were suffering politically because of rising energy costs? Were we about to see another easing of output restrictions?
The answers were no, no, and no but that didn't seem to matter.
One gets the feeling that, far from feeling pressure as a result of the discomfort of Biden, Johnson et al, the primary drivers of OPEC+ decisions, the Saudis and Russians, are enjoying it. They have major powers by the balls and the louder the leaders of those countries squeal, the harder they squeeze. The press release that followed the virtual meeting was couched in language about providing "…stability to oil markets…" but the decision itself read more as a "screw you" than anything.
That really shouldn't come as a surprise, although I admit I thought that there may be some backdoor dealing that resulted in an offer that OPEC+ couldn't refuse. Putin and Mohamed bin Salman, the de facto ruler of Saudi Arabia, had much better relationships with Donald Trump than they have with Joe Biden, so anything they can do to put pressure on the current administration is in their long-term interests. There is a danger that as the world moves away from fossil fuels, OPEC+ countries will leave themselves with stranded assets if they don't take advantage of increased demand and high prices. However, long-term geopolitical concerns seem to be outweighing that right now.
Given that, the real surprise came not in the decision itself, but in the market's reaction to it.
After the announcement, crude dropped around five bucks.
As I said, that is a classic "buy the rumor, sell the fact" kind of thing given the run up in the morning that preceded the end of the meeting but, in the context of a market where supply remains restricted and demand is increasing, it makes little sense. Over the next couple of months, those basic facts of supply and demand look like remaining in place so, even though the OPEC+ announcement resulted in a drop in crude, I remain bullish, if a little more confused than I was before, at least until the end of the year.
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