Do You Dare To Be An Oil Bear Now?

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The trader could not have sounded more empirical with his remark:

“I wouldn’t be short oil overnight in the current climate for all the tea in China. Period.”

We were going back and forth about Thursday’s 2% intraday run-up in crude, which marked a third straight day of wins for the bulls. And there could still be another day added to this streak, depending what happens in Friday’s session in New York, although early trading in Asia had shown the market unwinding, possibly on pre-weekend profit-taking.

More Hyperbole Than Fact?

My argument: yes, geopolitical tensions are running high in oil, but there’s also more hyperbole than fact in the market now. We know the Iran-aligned Houthis have claimed responsibility for the drone attacks on two Saudi oil pumping stations this week, after earlier hits supposedly on oil tankers belonging to the kingdom and the UAE. We also know the Saudi-led military coalition in Yemen had carried out several air strikes on the Houthi-held capital Sanaa in response. Anyone who’s followed the Yemeni war over the past four years and its senseless killing of nearly 18,000 civilians will probably be desensitized to these cat-and-mouse games between the Houthis and Saudis by now.

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Bottomline: to me, all these didn’t warrant a 2% spike in oil. The market actually settled off its highs on Thursday, with finishing 1.4% up and closing 1.2% higher. Yet, I couldn’t accept such a price action, just after news of a near six-million-barrel weekly build in U.S. crude a day earlier. Not after the International Energy Agency said the global oversupply hasn’t gone away despite six months of production cuts by OPEC.

Iran, Venezuelan Sanctions Drama In Unbelievable Slow-Mo

And while there’s an OPEC+ preliminary meeting this weekend, where the Saudis, Emirates and other price hawks are likely to make an early push for an extension of production cuts ahead of the more-important June 25 sitting, the unresolved U.S-China trade war and its unknowns still hang over the longer-term fate of oil demand. And the so-called choke of Iranian and Venezuelan oil through U.S. sanctions continues playing out in unbelievable slow-motion, to the extent many have come to accept them as a dynamic that could be reversed anytime, even by Washington itself, if the right political will is there.

The trader acknowledged all I said, but still pushed back.

“The pipeline is what freaked people out,” he said, referring to the drone attacks on the Saudi oil pumping stations.

“If they (the attackers) got lucky, that could have been huge problem. God forbid they get a tanker (next). It’s just so hard … they operate in such small groups and if successful, they could make a huge problem as all would, rightly so, blame Iran.”

As a concession, he added:

“Everyone myself included wants the situation to calm down, but, the risk is there and it’s real. Zealots are unpredictable and can cause tremendous havoc easily.”

“I understand your frustration, shame the world/people have to be this way. Live and let live.”

Which brings me to the point of this article: are there still courageous oil bears out there?

The ‘Right’ Bear With Nerves Will Prevail

While a leopard doesn’t change its spots—let alone an oil bear with an affirmed downside bias or too deeply-entrenched positions—the sheer number of countervailing factors at play now in oil may give even the most hardened short-sellers a pause.

John Kilduff, partner at New York energy hedge fund Again Capital, said in a recent interview with that those with the “right strategy and conviction will dig their heels in to go against the trend, as nothing is more thrilling to them than proving the market wrong.”

But he added:

“You got to remember then you’re practically standing in the path of a freight train. This isn’t for those with a weak gut or easily overwhelmed by the multiple fear elements used by the bulls now to whip up prices.”

Chief among those fears, of course, is that another Gulf war could break out, involving a seemingly reluctant Iran, which the Saudis seem eager to punish for its alleged transgressions on the Kingdom’s oil sovereignty.

Trump Himself Does Not Want War With Iran

This premise is alive and well in the minds of not just oil bulls but also the bears, and we can thank U.S. National Security Advisor and chief Iran hawk John Bolton for searing that into our consciousness—despite Reuters reporting on Thursday that U.S. President Donald Trump himself has told his top advisers he did not want the United States to go to war with Iran.

And it’s not just geopolitics that’s working against the bears. The market structure of the current oil rally also has time-spreads in favor of the flat price. That’s causing some of the deepest backwardation in oil now, where contracts further out trade at large discounts to those nearby, earning “easy” money for those who just roll out of front months that expire into new ones. This is what is giving legs to the oil rally.

Said Scott Shelton, energy futures broker with ICAP (LON:) in Durham, N.C., himself an oil bear:

“I think it’s safe to say that this is a ‘perfect storm’ of bullish physical information with a healthy amount of geopolitics risk out there.”

“For those looking for sellers, I think you have to look to the producers, which will only worsen the backwardation.”

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