Oil prices hit two-year-highs on Monday amid signs of continuously tightening markets and strong signals from Saudi Arabia and Russia that they are willing to extend their production cut deal beyond March 2018.
The sentiment in the oil market has not been this bullish in more than two years, with oil demand growth expected to be strong along with OPEC’s rhetoric that it would do “whatever it takes” to rebalance the oil market. Brent has been trading above $60 a barrel for several consecutive days and its futures curve has been in backwardation for months. WTI surpassed the $55 mark, and it, too, appears to be approaching backwardation—a sign of a tighter market.
Yet, we are only in the sixth year of a commodity bear super-cycle—which usually lasts 20 years on average, and “this oil bear has room to run”, Austin Pickle, Investment Strategy Analyst at Wells Fargo Investment Institute, said in a note last week.
We are currently stuck in the second stage of this super-cycle bear market, in which oil prices are range-bound and will remain so for years. According to Wells Fargo, WTI oil prices will stay stuck in the $30-60 a barrel range for another five to ten years—until the super-cycle bear market is over.
This means that WTI prices will likely have little upside now that they have hit the mid-$50s, Pickle says, adding that Wells Fargo is keeping its year-end 2018 target for WTI oil price at $40-$50.
Some investment banks have started warning that fear of the oil overhang will turn into fear of a supply crunch next year, and started to tentatively revise up oil price forecasts.
But Well Fargo’s Pickle leans on history for the super-cycle bear market analysis and warns that “we would caution investors to avoid getting too excited that the next bull market may be just around the corner.”
The commodity super-cycle bear markets since 1800 have lasted typically around 20 years on average, but have shortened lately, Pickle says in his analysis. The last super-cycle bear market in oil was from 1983 to 1999, and the current bear market is almost perfectly following the previous cycle trend.
In the previous super bear market, after the 1986 oil price crash, it took the market more than 12 years to turn to the next super-cycle bull market.
“Luckily, we do not see this bear cycle lasting quite so long—our best guess is another 5– 10 years,” Pickle noted.
The strategist outlines the three distinct phases of the super-cycle bear market: thinning out the weakest players in the initial price crash; oil prices stuck in range-bound trade for years; and exasperation when many companies—fed up with thin profits in the lower-for-longer prices—close up shop and investors move to other opportunities.
Step one of the healing process toward the next super-cycle bull market is weeding out the weakest exploration and production companies—and we have passed this stage.
In North America, between the beginning of 2015 and end-July this year, a total of 128 oil and gas producers filed for bankruptcy, including 14 E&P firms in 2017, according to Haynes and Boone’s latest Oil Patch Bankruptcy Monitor.
The second stage of the super-cycle bear market—in which we are currently stuck—is range-bound trade in oil prices lasting for years, as the companies that have survived the crash learn to live within their means.
“Money is no longer being thrown at every imaginable oil play, and only the most cost-effective oil producers remain. As a result, the remaining companies survive low oil prices for longer,” Wells Fargo’s Pickle said.
The market needs “peak exasperation” to turn around the bear super-cycle, according to the strategist.
While oil majors are preparing for lower-for-longer—and even “lower forever”—oil prices, warnings have been growing that an oil price spike is inevitable after 2020, due to years of underinvestment in exploration and new supply following the 2014 price rout.
“This lack of investment and interest in the space allows demand to overwhelm the potential supply response—and a bull market to be born. Unfortunately, we are not there yet. The shortest bear market on record, back to the year 1800, lasted 13 years. As of today, we are only in year six. This bear still has room to run,” Pickle notes.
Only time will tell if this will be the shortest super-cycle bear market in history, and how far this bear can run.
By Tsvetana Paraskova for Oilprice.com
