Why I am bearish on crude oil?

2022年8月6日

The reason is simple but right to the core: The whole world wants it to be cheap. Inflation, inflation, inflation. People are talking about inflation all the time, including. But not limited to: US Fed head Jerome Powell “clock is running to bring inflation down”; ECB president Christine Lagarde “Inflation to Remain Undesirably High for Some Time”, so on and so forth. The truth is everybody working in the economic department is trying to bend down inflation, and to bring it down, the greatest enemy they are facing is: crude oil.

USOIL

The chart above shows Usoil price for recent months. The sharp increase at March 2022 is due to the war declaration of Russia invading Ukraine. Since then, the price hasn’t really came down because of both the COVID-19 pandemic and its chain reaction leading to a global supply shortage, i.e. crude oil cannot be transferred easily both through ships and cargos.

We can also see that starting from beginning of June, oil price started to drop in a moderate speed. Why is that? We all know June is the months that U.S inflation spikes to 9.1% (which is U.S CPI index in year ended June 2022). That is also the reason why U.S president Biden specifically traveled to UAE, trying to add influences to OPEC+ countries, give them some good spices to drill down oil prices in order to bring down current inflation which is unreasonably high since 1981.

Currently, the oil price traveled back to a level close to the price of February 2022, in which the time right before Russia-Ukraine tension started to arise. Although one would argue that today’s price level is enough since the OPEC+ is still somewhat reluctant to expand oil supply, plus supply issues are still present in Asian countries including China.

However, since almost all over the world is experiencing high inflation, and OPEC+ is pressed by U.S white house for mostly political and economic reasons to increase their production, plus the country itself is trying very hard to produce as many oil as possible, we are not seeing a supply shock coming, rather, supply is going in a uptrend. For demand, given the fact that economy is not running well in the world, consumers are not buying much. We can somewhat speculate this upon U.S weak GDP for Q1 2022.

Therefore, I would be bearish on USoil, my TP for WTI is at least back to December 2021 level of $60. It will take some time for it to tremble back, probably the shortest time frame is 2 months, highest up to 1 year. As those political effort stabilizes and economic data started to look pretty, it is the time for us to reconsider buying back crude oil.