The Real Game
The market share war is back
‘‘Low prices and rising exports from the Americas could well lead to pronounced stockbuilds in the coming weeks.’’- Vortexa weekly report
In this report: Market share war- the real game. Trade charts.
Welcome to big oil decline
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Global commodity markets react to tariffs
Special Report- Squeezing the barrel- Energy and A.I.
Macro
U.S oil drillers have remained in first gear with flat production, anticipating tariff turbulence.
Tariffs = inflation/trade barriers = demand destruction.
They have been correct to keep production flat, anticipating geopolitical shock. It is my view while the U.S economic high frequency data remains fair to good. DXY sentiment and macro shifts have led to an increased stagflation narrative that should shift down the positive high frequency data- GDP, NFP, CPIs, PPIs . Tariff risks are very real. We have an oil price shock, not helped by OPEC+. Remember we are trading futures up to 10 years out with contracts expiring monthly in energy, so the weight of the anticipated future, becomes the present. There is zero lag time. Everything that is high probability to happen, gets baked into the price immediately. Markets price in everything, everywhere, all at once.
Where are we now?
The oil and gas sector took a sharp hit from liberation days tariff announcements, with shares dropping 15% before rebounding on talk of a pause. The unscheduled raising of OPEC+ production was masked by Trump’s limelight. If tariffs land anywhere near the initial proposal, the damage to demand could be significant-1 million bpd shaved off 2026 global oil demand, with Brent falling to $64, according to Wood Mackenzie. LNG isn’t spared, though U.S exporters may find upside in Europe and Asia. The bigger integrated players are better positioned, leaner, more resilient and already cutting capex, while smaller upstream firms look exposed. Just look at 2014-2016 for a playbook.
Final investment decisions (FIDs) on new upstream projects are likely to stall, and M&A could pick up later, led by Majors and NOCs seeking long-life assets and portfolio depth. In short: tariffs are deflationary for demand, supportive of consolidation, and a fresh test of capital discipline.
The Big Game of Market Share
There are many streams of narrative you can bring to the oil price, making it one of the hardest futures markets to trade for speculators. There is a lot of confusion about why OPEC+ have added 440k bpd to production at a time of uncertainty in the global economy. The official party line is that they are teaching member countries a lesson for over producing like Kazakhstan, however, while true, this is a red herring to distract from the bigger game- market share.
It is important to remember this organisation thinks in generational timelines, not in the today and this year scale. Their short term is your long term. Market share is what ultimately matters and OPEC want as much as possible of the diminishing crude demand future. When the music stops, no one wants reserves in the ground.
Context: The 2014–2016 Oil Market Share War
Trigger: The rise of U.S shale oil production was flooding the market and threatening OPEC’s market share.
Saudi Arabia’s Response: Rather than cutting output to stabilize prices, Saudi Arabia increased production in late 2014.
Intent: To drive down prices, make U.S shale production economically unviable (since shale has higher breakeven costs), and reclaim market share.
Impact:
WTI crude collapsed from $100 in mid-2014 to below $30 by early 2016. When oil was about $35, I remember calling customers in Houston at the time, Heads of global drilling ops. I was chasing invoices. Some clients literally said ‘‘Tim, I don’t know about the invoice…..I don’t think I even have a job come Monday’’.
Dozens of U.S shale companies went bankrupt.
It significantly slowed the shale boom and caused major job losses in the U.S oil patch.
I believe OPEC+ will continue to raise production until it hurts a lot more, based on their reintroduction of supply started this month. This started at 138k bpd and ramped to 440k bpd. Watch for more additions in the coming months.
How much hurt? $40 to $50 range WTI. The chart above plots for a re-test of 2016 back adjusted prices. We traded a low of $26.05 that year.
Given we have precedence for this, I believe oil will trade down another 20% before low prices create extremely tight production levels and drive marginal drillers out of business. These will yield a snap back higher eventually. This whole cycle? Could be 2 years from today.
Nothing solves low prices, like low prices.
Non-OPEC+ supplies post highs in March
More about the sleeping tiger that is India.
TRADE
ALL CHARTS ARE NON BACK ADJUSTED
Similar to 2014 as discussed above, we are potentially in a death spiral. I believe that unless we see strong evidence of demand come back via manufacturing in both U.S, Germany and China, that there is nowhere else but down. Petrochem feed stock demand is wavering. HOWEVER- this is the big overarching view. In terms of price structure, there is a lot more to happen before we see the demand destruction actually show up.
So until then, we can rebound out of extreme lows priced in last week. We traded $55.24 lows last week on WTI. I think the week will start off with a little relief to test higher resistance points that got smoked over the last 2 weeks with no controlled auctioning.
Focusing in tighter, 2015 high level $62.58, while it is a great pivot area, will get lifted. The next significant areas above are $66.60-Pre COVID 2019 high. Should we get back to Q-PVAL $68.41s, this will provide a great area for sellers to reload and potentially drive back down to below $62.58s- maybe $55’s over the next Q. The market now awaits through-put of the supposition that demand is getting wrecked. High frequency data will lead the way i.e. refinery utilisation rates. It is ALL IMPORTANT to see in the C.O.T data what commercials are doing. Watch for oil to trade more attentively than normal on high frequency economic data i.e manufacturing data, PPIs and NFPs.
We are at a moment in history. There are not many. There have been days in the week gone by where ES printed 4%+ auctions i.e 30min bars. I can only recall seeing this once during Volmageddon in 2018. Treasury auctions have been close to failing and faith in the DXY is diminishing rapidly. If this DXY narrative holds this week, we have a lot more drama to come. Gold is showing its class and is THE CURRENT LEADING INDICATOR on sentiment. Like a carpenter with a saw, we must protect our capital so we can come into work tomorrow… and the next day, and the next. Stay sharp!
