Oil Market Update: Price Risk Skewed to the Upside
Expert perspectives on the oil market, along with my thoughts and implications for Bison Insights stock ideas
The EIA reported another large draw in U.S. petroleum inventories this week. While the draw was smaller than in recent weeks, it pushed total inventories even further below the five-year historical range. Recent declines have been so significant that I had to move down the y-axis minimum on the chart to make room!
Despite another reported drawdown in inventories, oil prices are down to just $68 per barrel, creating a growing disconnect between oil prices and inventories. A simple historical correlation between oil prices and inventory levels suggests that oil should be trading much higher here:
This disconnect would make more sense if an imminent oil glut was upon us. But that appears to be far from the reality: Iran continues to insist that the MOU gives it authority over traffic through the Strait, and over the weekend Iran shot at four ships that tried to transit on the Omani side without Iranian permission. Flows remain restricted and at risk, with conflicting data and claims that all show reduced Strait transits:
On the other hand, China has significantly reduced its crude buying. Kpler estimates that China’s seaborne crude arrivals fell to 6.36 million barrels per day in May, down from 11.39 million barrels per day in February, the last full month before the Iran war. That is a 5 million barrel per day decline in seaborne arrivals, which has helped balance the market for now.
Will China resume crude buying? And if so, when? And what would an on/off reopening of the Strait of Hormuz mean for oil prices?
These are several of the major questions oil market experts are focused on right now. In this article, I present several expert perspectives on these questions, along with my own thoughts.
Meanwhile, a major left-tail risk for oil prices and energy equities has now effectively played out: an announced “peace” deal between the U.S. and Iran, followed by a broad sell-off. Bison Insights ideas haven’t been immune to this sell-off, and have moved lower along with the rest of the oil market:
But with this left-tail risk now largely “priced in,” I think the risk/reward for oil stocks may be skewed to the upside, presenting compelling entry points for many of these ideas. These ideas are the ones I think are best positioned to do extremely well in a higher oil price environment, with a margin of safety in a lower price environment. And I have been adding to my positions in them, while preparing to share a new idea soon.
As a reminder, the full list of these ideas and updates to them can be found here in the Bison Insights article directory, available exclusively to paid subscribers.
Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance is not indicative of future results.
