By Tim Puko
The financial crisis may have taught investors a lot of lessons, but none that helped them predict the relentless downturn in oil.
U.S. crude dipped past $40 in intraday trading Friday afternoon for the first time since 2009, and that’s about where the similarities stop. Back then, oil’s sharp plunge ended within about six months. This crude collapse just finished its 14th.
The new course has been punishing for many investors who bet on a quick recovery this spring. But the pain they’re feeling — and that oil producers around the world are feeling — is actually quite normal, according to researchers at the Houston investment bank Tudor, Pickering, Holt & Co. Oversupplied commodity markets, like oil right now, don’t usually recover in a matter of a few months, but usually over several quarters.
The financial crisis was rare for oil in that its rebound started within 200 trading sessions, according to the bank’s research. This downturn has already hit 290 trading sessions since last summer’s peak. Oil market downturns in 2001-02 and 1998-99 lasted between 330 and 350 sessions, the bank said.
“The last year-plus has felt terrible, but it isn’t out of context with what has happened historically,” said Jeff Tillery, head of Tudor, Pickering’s research group. That’s “not going to make anyone who owns these stocks and is losing money almost every day feel better.”
This bear market, pushed by U.S. shale-oil that is quicker and cheaper to access, more closely mirrors 1998-99, he said. Back then, the Organization of the Petroleum Exporting Countries was showing big supply growth – just like the U.S. now – and both periods also included panic about demand growth in Asia. Back then the Asian financial crisis roiled markets around the world, and this year’s fear is about how quickly the growth that turned China it into the world’s second-largest oil consumer is receding.
Oil and motor fuel stockpiles are growing around the world. OPEC production has increased, cancelling out marginal declines in U.S. production in recent months. (http://www.wsj.com/articles/fall-in-u-s-oil-stockpiles-helps-push-prices-up-a-tad-1439976776) That has to reverse and the supply cutbacks have to happen before the recovery can begin, Mr. Tillery said.
“You may think you’re (at the bottom) a handful of times, but until … inventories clear out and give the all-clear sign, we’re stuck in the mud,” he added.
More investors, analysts and researchers have been coming to that realization in recent weeks. (http://www.wsj.com/articles/likelihood-of-u-s-oil-sliding-to-30-a-barrel-is-increasing-1439997047) Many who had predicted a rebound for late this year, now say one is unlikely before the second half of next year or 2017. U.S. government forecasters last week cut their oil-price forecasts and see oil holding below $60 a barrel, on average, through 2016.
Signs that production is still strong and that demand is likely to start shrinking have kept up the pressure to keep selling futures even as oil neared $40 a barrel, said Daniel Bathe who manages $150 million in commodities at Lupus alpha Asset Management AG in Frankfurt. Options market volatility is also at normal levels, a sign the market is really weak, and not just reacting to fear and speculation, he said.
“I don’t see a significant rally from these levels,” he said. “Lower for longer seems to be the case.”
Nicole Friedman contributed to this article.