What may maintain the oil rally going

There is something of a near-universal bearish consensus in the oil market right now and that’s always dangerous. The thinking is that the rapid return of OPEC+ barrels (with more to come) and the seasonal slowdown towards winter demand will inevitably lead to a glut and prices into the $50s.

It’s compelling and that’s why it’s so universal.

But oil prices aren’t cooperating and they’ve stayed stubbornly high, including a two-day rally that’s now more than $3 to teste the best levels since early Sept when OPEC last boosted output.

One line of thought is that China is stockpiling oil, swallowing up the excess barrels. There is some evidence of that and when it inevitably ends, that could be the rug-pull the market is fearful of.

But what if there is something else going on? Yesterday I highlighted a small series of higher lows and today’s rally helps to confirm it. The September highs of $69.53 in brent and $66.03 in WTI are the big barriers that need to be broken.

What could sustain a rally from there?

The big thing is Russian oil. Ukraine has had some success in striking Russian oil infrastructure and that may be driving fears of a true loss of Russian supply. More recently, Trump has also changed his tone on the war, berating Europe for buying Russian oil and encouraging Ukraine to step up attacks.

Should the US get behind a ‘destroy the Russian economy and oil infrastructure’ strategy, the tail risks for oil are huge. Russia produces more than 10% of global supply and that kind of thing could take oil to all-time records.

What else? It could be as simple as better global growth. The trade war had the market worried but those fears are fading at the moment with growth and employment numbers holding up. Chinese equities are also rallying and that country could be a big source of upside oil demand.

I don’t think there are any easy answers here but price action often moves ahead of narrative.