Raymond James: Bear Market for Oil Caused by 'Fake News'

(Bloomberg) -- Analysts at Raymond James invoked one of U.S. President Donald Trump’s favorite phrases to explain oil’s descent into a bear market -- and bolster their case for why crude can rise to as much as $65 a barrel.

Conventional wisdom holds that resilient U.S. shale drilling, underwhelming progress towards OPEC’s goal in slimming global oil inventories, and output recoveries from nations exempt from the deal to curb production helped push crude down more than 20 percent from recent peaks. But according to analysts led by J. Marshall Adkins -- noted oil bulls -- the bad times for oil can be chalked up to “fake news” that amplified the downside.

“The recent collapse in oil prices was triggered by a breakdown in the technical charts but fueled by the ‘negative feedback loop’ of bearish headlines that usually follow price declines,” the analysts wrote in a July 3 note to investors. “Some oil price headlines have been misleading, or outright wrong, and they have distracted investors from what we believe is fundamentally a bullish overall picture.”

Crude futures rose 1.7 percent Monday to $46.81 a barrel, for an eighth straight advance after settling below $43 a barrel on June 21. While prices surged last week, oil in New York and London still posted a monthly loss in June after tumbling into a bear market on concerns that rising global supply will counter cuts from OPEC and its partners.

Those concerns have been overblown, the Raymond James analysts argued, saying trends pertaining to U.S. inventories, production and gasoline demand have been misinterpreted. They put out a list of “myths” that explain the downturn and set out to debunk them in arguing that crude can rise about 45 percent from current levels.

Raymond James focuses on U.S. inventory data since early March to capture the impact of OPEC’s production curbs given the time it takes to ship oil from the Middle East to U.S. refineries. They find U.S. crude inventories have averaged “massive” declines of roughly 280,000 barrels per day over this span, compared to a mean build of 180,000 barrels per day during this seasonal period over the past decade.

Moreover, factoring in stockpiles of refined products “would actually be more bullish than looking at the crude only trend,” the analysts contend. Extrapolating this to the global level implies that crude "inventories have been falling by about 1.2 million barrels per day over the past four months," according to Raymond James.

An important caveat that augurs against such an extrapolation: this analysis includes changes in the strategic petroleum reserve, which has experienced an unusually large drawdown this year and thus magnifies the seasonal deviation of total U.S. inventories from their medium-term norm.

Wednesdays -- the day when the Energy Information Administration releases weekly production and inventory data -- have been particularly woeful for crude, underscoring that investors’ interpretation of these figures has been the key contributor to the commodity’s poor showing year-to-date.

The death of U.S. gasoline demand has been greatly exaggerated and doesn’t jibe with data on miles driven, they add, while electric vehicles don’t pose as meaningful of a threat as investors are assuming.

Worries on the supply side about a flood of oil coming from drilled but uncompleted wells in the U.S. or a further jump in Libyan and Nigerian production in the event that internal turmoil diminishes are similarly overstated, per the team.

The analysts neglect to bring up one of their own old calls: that West Texas Intermediate would touch $80 per barrel this year.

“While increasingly lonely in our bullish oil price view, we are still convinced that oil prices are on track to set cyclical highs over the next six to 12 months, and we encourage our readers to stay focused on the real fundamentals and not get caught up in the day-to-day torrent of noise,” the analysts conclude.

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net. To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net Brendan Walsh.