Is being bullish on oil is getting harder?

Brent crude completed a record-equaling streak of nine days of successive gains, so you could be excused for assuming the oil bulls are back in business after one of the roughest quarters in contemporary recollection. But you would be incorrect.

While Brent crude has ricocheted from a low beneath $50 a barrel over Christmas to go back above $60 a barrel, bullish investors in oil still appear to be in tight supply. Data for Brent suggests that hedge funds and other large speculators may have extended their net long positions last week, but the bulk of the movement appears to have been allowed for by traders closing out short positions rather than becoming more optimistic.

This is despite crude having plunged from above $86 a barrel in early October, and with several structural factors acting in the bulls’ favour.

First, the fall to below $50 a barrel was then looking like a classic overshoot. With US barrels trading at a substantial deduction to Brent because of pipeline capacity restraints, the producers that have fuelled the US shale boom were looking at an estimate in the low $30s with Brent near $50 a level that could rapidly have reduced production of the world’s preeminent source of oil supply expansion.

Second, Saudi Arabia and Russia have driven the so-called Opec+ group in another round of supply quotas to curb the price drop, commencing in January. While the true magnitude of the contraction remains to be known.

Saudi Arabia has made explicit it will do as much as feasible to avoid prices spiralling lower. Third, Iran’s oil exports have declined at the end of the year, down 60 percent since last spring to just above 1m barrels a day. That is despite the US issuing waivers to several Tehran’s clients when it re-imposed sanctions in November, a blow many traders cited that for partly triggering oil’s fourth-quarter rout.

The restoration to $60 a barrel has further been facilitated by the wider market backdrop, with stocks stabilising and the US dollar weakening, making commodities priced in the US currency cheaper. So against this backdrop, the challenge must be: why have the oil bulls been reluctant to materialize?

Traders and analysts point to two interlocking components: anxiety and a loss of conviction in crude oil’s capacity to sustain rallies in the era of US shale. The fear factor is justifiable given oil’s 40 percent slide in the fourth quarter, with many investors left bruised and battered.

The bigger longer-term consideration for the industry and those speculating on oil’s revival is just how deep those fears now run.

Shale’s performance in 2018 continues to make it less likely that prices can sustain rallies above $70 a barrel for long. Oil bulls will yet find opportunities if they are adroit, but 2019 is nevertheless looking like a grim year to be a bull.