When a bet goes wrong, investors are often tempted to hold on, convincing themselves that their short-term trade was always meant to be a long-term position. The self-delusion is easiest in commodity markets: Their cyclical nature means that, inevitably, what’s high will eventually be low and vice versa. It just takes patience — and the stomach to withstand losses for as long as it takes.
With oil benchmarks down almost 20% over the last two years, upbeat investors are, out of necessity, waiting. The meme “We remain bullish” even trends on social media, defying the fact that almost every Wall Street bank remains resolutely bearish for 2026. For what it’s worth, I’m similarly bearish short-term. But that doesn’t mean oil prices — and the equities associated with the energy market — won’t eventually rebound.
Ali Al-Naimi, who was Saudi oil minister for more than 20 years, once summarized his working life as riding a price rollercoaster. “During my seven decades in the industry, I've seen oil at under $2 a barrel and $147, and much volatility in between,” he said in 2016 just before retiring. His wisdom remains relevant today.
In Commodity Markets, What Rises, Falls
Oil markets are cyclical by nature, and some bulls are holding to their loss-making investments hoping for a future recovery
But waiting for a recovery will require a ton of forbearance, and incur significant opportunity costs. That’s particularly true for anyone who bought at $100-plus a barrel, given that crude today hovers around $65. It's even worse on the equities side; small- and medium-sized oil companies traded in 2022 and 2023 at unsustainable multiples, and many have since fallen anywhere between 20% and 50%.
Recovering such drawdowns won’t be easy. The last big downturn is illustrative of the wilderness that lays ahead for the bulls: Brent crude lost its triple-digit valuation on Sept. 9, 2014, and it didn’t recover that level until Feb. 28, 2022. That’s a long — and expensive — seven years, five months and 19 days before being able to claim victory.
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One can paint a mildly bullish picture for crude prices, probably as early as 2027 and even more so in 2028-2029, on the back of two main factors. First, despite a slowdown, current global oil demand growth remains healthy, not far from the 20-year long-term average of increasing by about 1.1 million barrels a day. Barring a global recession, we’ve probably seen the bottom of demand growth. Second, low prevailing prices will dent investment and thus future non-OPEC+ output. The US shale industry, more sensitive to cheap oil and quicker to react to low prices, is already flashing signs of plateauing; top American shale producer Diamondback Energy Inc. said earlier this week that US oil output faced an “inevitable” drop after companies slashed drilling.
The oil supply-and-demand forecasts for 2026 and 2027 suggest that in recent weeks barrel counters have started to shave their estimates for global production two years down the road. That’s an important sign that an inflection point would come. Additionally, as OPEC+ countries hike output, what’s left as spare capacity gets exhausted, typically pushing up prices. Finally, global crude inventories were low before the glut hit the market, limiting stockpiling.
Add to the bullish cocktail other potential unknowns — a hurricane damaging US Gulf of Mexico oil output, a cold winter boosting demand or even war erupting in an oil-producing nation. On top, there’s Donald Trump: All that stands between an oil market battling a significant glut and one weathering a major deficit is a presidential social-media missive announcing real oil sanctions against Iran and Russia. Thus, the bulls may get it right if the White House helps. Sadly for them, Trump has made clear that he dislikes high oil prices, even though he slapped an additional 25% tariff on Indian exports on Wednesday as a punishment for the country continuing to purchase Russian oil.
Still, put all of this together, and a bet that oil will trade higher in 18-24 months — say above $75-$80 a barrel — has a decent chance of coming good. What about $100 a barrel? Highly unlikely. What about record prices above $150? Never say never — but no.
There’s a worrisome catch: Some of the bullish catalysts require even cheaper oil first. To see non-OPEC+ production growth stopping, or even declining, the industry needs a painful period of $50-to-$60 prices that convinces every board of directors to slash investment. To see the cartel exhausting its current spare production capacity, OPEC+ needs first to pump more, driving prices lower. In summary: To be bullish on the medium-term, one has to be bearish over the short-term.
There’re other obstacles. Oil demand is still healthy, but its rate of growth is on a structural downward trajectory because of shifts in the structure of China’s economy, plus more efficient gasoline cars and electric vehicles hitting the streets. The longer the bullish cycle takes to emerge, the greater the risk that demand growth won’t be sufficient to provide an uplift to prices. Non-OPEC+ production may surprise to the upside too, particularly outside the US shale industry. Projects in Guyana, Brazil, Canada, Uganda, Norway and China will add extra barrels over the next couple of years, no matter what prices do. Non-OPEC+ output growth may slow, but won’t collapse.
So, while one can get enthusiastic about the prospects for oil a couple of years down the road, taking a long position in the Brent December 2027 futures contract (to name a popular bet) requires quite a willingness to stomach potential paper losses in between. For now, everything points to lower prices in the next few months, particularly after the seasonal demand uplift during the Northern hemisphere’s summer fades. Over time, the current low prices will create the foundations for the next cyclical upturn. But that’s far, far away.
• Bloomberg