A non-consensus trading opportunity as the selloff in crude oil gathers attention

Key Takeaways:

• Oil prices have fallen due to aggressive tariffs and increased OPEC+ production.
• Saudi Arabia’s potential price war threatens to prolong low prices.
• Global container bookings from China to the US have dropped by 60%.
• Easing tariffs could trigger a surge in demand, leading to higher oil prices.
• A trade deal with tariffs at 10% or lower could catalyze a rally to $70 per barrel.

A Turbulent Month for Crude Oil

The crude oil market has experienced a tumultuous month. On April 2, President Trump’s aggressive tariffs announcement rattled investors. The market braced for lower demand due to a potential slowdown in the global economy, coupled with expectations of higher supply as OPEC+ planned to ramp up production more than anticipated.

A Brief Respite and Renewed Uncertainty

There was a momentary rebound on April 9 when President Trump paused the reciprocal tariffs for 90 days. This pause led markets to anticipate further de-escalation, prompting them to price out the fears of a global slowdown. However, the optimism was short-lived. Delays in reaching trade deals and fresh news of increased supply soon weighed heavily on market sentiment, causing prices to tumble once again.

The Shadow of a Price War

The situation escalated when reports emerged that Saudi officials had informed allies of their capacity to withstand prolonged periods of low oil prices. This statement was interpreted by many as a looming threat of a price war, further exacerbating the selloff in crude oil. The market’s focus has been intensely fixated on supply-side dynamics and geopolitical maneuverings.

An Overlooked Opportunity in Demand

Amidst the bearish sentiment, a potential non-consensus trading opportunity is emerging, rooted in the demand side of the equation. Global ocean container bookings have plummeted since the tariffs were announced, with bookings from China to the United States down a staggering 60%. This significant decline suggests a backlog of unfulfilled demand that could surge if trade tensions ease.

The Potential for a Bullwhip Effect

Should President Trump decide to ease tariffs, the market might experience a phenomenon akin to the ‘COVID-like bullwhip effect.’ In this scenario, the floodgates would open as canceled orders are reinstated, leading to a substantial surge in demand. Such a scenario could propel oil prices upward, making a rally to the $70 per barrel mark for West Texas Intermediate (WTI) crude not just possible but plausible.

Timing Is Everything

However, seizing this opportunity requires more than just a contrarian perspective—it demands impeccable timing. Trading legend Michael Steinhardt famously asserted that one should be able to articulate, in two minutes, four critical components: “the idea, the consensus view, the variant perception, and the trigger event.” In this context, the trigger event is likely to be the specifics of the first trade deal. The market will extrapolate future expectations based on this agreement, and an average tariff rate of 10% or lower could serve as the catalyst for a significant rally in crude oil prices.

The Path Forward

Investors eyeing this potential upswing should remain vigilant. The viability of this opportunity hinges on the details of upcoming trade agreements. If the resultant average tariff rate exceeds 10%, the anticipated surge in demand—and consequently, oil prices—may not materialize. Conversely, a lower tariff rate could validate the non-consensus view, rewarding those who timed their positions correctly.

Conclusion

While the crude oil market grapples with supply concerns and geopolitical tensions, underlying demand factors may offer a silver lining. A convergence of eased tariffs and pent-up demand could ignite a rally, presenting a unique opportunity for those attentive to the nuances of global trade dynamics. As always, the intersection of insight and timing will determine who capitalizes on this potential market shift.