For over a year, the narrative has been that the market is oversupplied. But inventories haven’t materially built up and we’re in a season of strong demand, so why not test the market. OPEC+ also cares about its reputation. It wants to be seen as in control of both the market and internal discipline, though I’m skeptical about the idea of punishing non-compliant members. Geopolitical factors also help explain its strategy; Trump is visiting the region next week, with arms deals, a possible nuclear agreement, and energy pricing all up for discussion.
How much lower could oil prices fall?
We’re probably not far from the bottom. There’s significant pent-up financial demand for oil. Over the past few months, financial participants have been selling oil as a hedge against recession. If we avoid that recession, they’ll need to unwind those positions. Oil is also an asset, just like gold, and by any metric, oil is cheap relative to gold or equities; from a financial portfolio perspective, it remains under-owned. Add to that a global shortage of investable assets and too much money, and oil stands out. At around $55–$60 Brent, we should begin to see supply curtailments. That translates to about $45 WTI in Canada, which is where it gets uneconomical for some producers. At that level, you'd expect production cuts. Also, I don’t believe President Trump wants WTI to fall below $50. Below that, it starts damaging the US oil sector - a key political and economic constituency. Prices could fall another $5 if the algorithms kick in, but beyond that, there just aren’t enough sellers. Discretionary traders won’t sell at $50 WTI regardless of how bad Chinese demand gets.