Reading The Tea Leaves For WTI

In light of today's surprise EIA print. I decided to revisit the oil market to try and get a feel for sentiment and overall market fundamentals.

First comes sentiment. Seems like most places I look, people are generally bullish on oil. Not a huge surprise. Usually, sentiment follows the prevailing price trend. And for oil, we've had a meaningful rebound from the lows. The oil glut crisis seems like a lifetime ago.

Additionally, CFTC positioning is obviously pretty long. I encourage those with BBG terminals handy to go ahead and adjust it for Open Interest for a more accurate picture - although, I don't think it would change much.

But as traders, we profit from questioning the consensus. So let's dig into some fundamentals.

One of the drivers of the oil glut was the increase of US production and subsquently US oil exports. Reviewing the chart shows something peculiar. Around the end of last year, we've had a divergence between US oil production and US oil exports.

We are still pumping out that stuff but are not selling as much of it? Could it be that we are simply consuming more?

Well, it turns out that's not the case either.

At the beginning of this year, we actually saw a trough in US inventory. Since then, that bottom has been clearly made and inventory has continued to build.

Digging into the minutiae of the production numbers. We see that major players in the creation of the oil glut (Russia, OPEC nations) have steadily maintained their production. Now, I'm not saying the possibility of a production decline is non-existent, I'm just saying there's no sign of it right now via the official numbers.

OPEC market share was crucial in the oil decline of 2015 as the OPEC nations could not step in to stem falling prices with production cuts.

Today, it seems that the OPEC nations are back in a precarious position where they probably would not be able to continue supporting falling prices much longer.

Moving on to the Baker Huges Rig count. This has had a meaningful recovery back to early 2015 levels.

Finally, from a more peripheral perspective, we have had a bursting of the sub-prime car bubble in the United States.

Subprime auto loans are trending towards 08 levels (probably a result of monetary tightening) and even prime auto loan losses have ticked up. Which probably ties into this next chart.

Overal vehicle sales have stopped increasing and could be forming a top. As the glut of car buyers dry up, we can finally piece all of the pieces of the puzzle together.

In my opinion, each puzzle piece snaps into place this way: 

• The production that caused the oil glut never really stopped. In fact, non-OPEC production has only increased.
• The OPEC countries took a pause when they could to help propel prices higher. However, the sustainability of that strategy is questionable in the face of low market share as evinced numerous times in history, as recently as 2015.

• Auto sales have benefited notably from the emergence of subprime auto loans. As monetary in the US tightened, those subprime buyers are leaving the market. (The increase in LIBOR also doesn't help as it means tightening for everybody).
• As that source of demand dries up, sales are teetering on what looks like a top and could possibly be the shrinking demand explanation for the divergence of US production and export. A lazy way to measure this shrinking demand is looking at inventories. 

• The world still mostly thinks oil is a long, but with the aforementioned points above, it's probably to jettison that position.

Well, there you have it. Good luck out there.