The bear market in commodities is already four years old, but there are risks that oil will make another final huge leg lower – contrary to anything consensus might imagine.

Although we don’t share Fed vice-chairman Fisher’s view on inflation (totally neglecting China exporting deflation and secular global debt deflation forces), he has a valid point in stating that the current oil shock is mainly supply-driven. Post-crisis, central bank Quantitative Easing has resulted in huge investment in overcapacity and thus de facto price deflation: a nice example of central banks aiming for one goal, inflation, and accomplishing the polar opposite.



US oil production surged to incredible levels at breakneck speed due to technological advances in fracking – all supported by a huge wall of investor money from zero interest-rate policies. And the OPEC cartel is effectively dissolved. The Arabs, as ultra-low-cost producers, will probably neglect the latest Venezuelan OPEC call in their quest for market share and basic revenues.

All the while, the broad investment community has tuned into the commodities channel over the past months. Many are looking for an oil bottom around $ 40 and a possible quick bounce a la 2008 / 2009.

There are a lot of good points made in favor of an end of the oil bear, for example by oil guru Andy Hall, to which we are quite sympathic (capex cut-off, absence of geopolitical price premium, demand picking up strongly in response to prices). Yes, the best cure for low prices is still low prices.

oil price history


But this oil price slump is nothing like 2008 – yet. We are experiencing a short term oil supply glut and have yet to encounter a possible demand crush due to a new global recession. If such a recession were to hit before the current production overcapacity is washed out, the bottom of the already oversupplied oil market will totally fall out. Think undershoots to $ 20 in the oil spot market or perhaps even lower.

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