Why is oil likely to stay bullish for a long time but not a bulls hoping for?

Key points:

• Oil prices have failed to break through in the past few weeks, frustrating bulls, despite a string of good news including falling inventories and reports that OPEC+ will stick to its pledge to cut production.

• There are three reasons why oil is likely to stay bullish for a long time -- but not the big rally the bulls are hoping for.

• Rystad Energy also warned that surplus will re-emerge following the relaxation of OPEC+ production cuts.

Despite a string of good news, including falling inventories and reports that OPEC+ will stick to its pledge to cut production, oil prices have failed to break through in the past few weeks, frustrating bulls, According to OilPrice.

Now the pendulum has swung the other way and the oil market has to scale a new Wall Of Worry.

After a brief, half-hearted rebound, the U.S. Department of Labor's weekly Jobless claims Report (Uiwc) on Thursday showed that jobless claims hit 1.106 million, an unexpected rebound after falling below 1 million for the first time a week earlier. Raising serious doubts about the sustainability of the economic recovery, oil prices fell back into a familiar trading range of around $40.

Tariq Zaheer, executive director of global macro at Tyche Capital Advisors, told Bloomberg: "Given all the bullish headlines we've seen about inventories in the past few weeks, not being able to break through the highs doesn't mean it's good. Crude has failed to break out to the upside and you are in the futures market, so the downside risks are significant."

Oil price volatility has returned to pre-COVID-19 levels and there doesn't seem to be any movement to shake the market.

There are three reasons why oil prices are likely to stay bullish for a long time but not the big rise they are hoping for.

$20,000 another supply frenzy

A huge supply glut and a lack of storage were the biggest reasons oil prices fell below zero for the first time in April. Thankfully, things are much better now than they were four months ago, which is why the oil price has recovered well.

But this is still the worrying part: while US oil inventories have been falling for the past two weeks, the decline has slowed sharply.

U.S. oil inventories fell by 10.6 million barrels in the week ended July 24, followed by declines of 7.4 million barrels, 4.5 million barrels and 1.6 million barrels in the following three weeks, according to the U.S. Energy Information Administration (EIA). Therefore, there is a real risk that the downward trend could reverse soon and that stocks could start to rise again - a very negative development for oil prices.

These inventory concerns have not been addressed as OPEC+ cuts back. Starting this month, OPEC+ lowered its historic production cut by 2 million barrels a day to 9.7 million BPD from 9.7 million BPD. But as Harry Chilinguria, head of commodity strategy at BNP Paribas, points out, the real concern is that an INCREASE in OPEC+ production could coincide with an uneven recovery in oil demand.

Rystad Energy also warned that surplus will re-emerge following the relaxation of OPEC+ production cuts. "The OPEC+ experiment to increase supply from August could backfire as oil demand is still not out of the woods," the consultancy said. The entire oil market will return to oversupply until December 2020."

Saudi Energy Minister Prince Abdulaziz bin Salman noted earlier this month that countries that failed to meet their commitments in May and June would make compensatory cuts in the coming months. But we all know that using OPEC+ doesn't guarantee anything.

The uncertainty of the epidemic

Recent gains in oil and stocks can be attributed to optimism that a COVID-19 vaccine will soon become a reality. Indeed, the race to develop an effective vaccine is under way: 185 research teams are involved worldwide.

Unfortunately, vaccine development is often a lengthy process, and safety is often the top priority. For example, a recently discovered dengue vaccine actually made the disease worse when vaccinated children were later exposed to the virus, while another vaccine developed for respiratory syncytial virus caused the same problem.

With no clear timetable for when a viable and safe vaccine could reach the mass market, the global economy and oil markets remain particularly vulnerable to the so-called second wave of the epidemic. Indeed, OPEC+ said last month that the oil market was recovering more slowly than expected because the outbreak could last longer.

1. the prosperity of renewable energy

When investors consider the relationship between oil and renewable energy, they often assume that low oil prices will dampen the growth of renewable energy. Although this is true in principle, so far there is no evidence that low oil prices have had a negative impact on the development of renewable energy. Instead, demand for renewable energy continues to grow during the pandemic, even as fossil fuels face the biggest demand disruption in their history.

The continuing wave of large writedowns in the oil and gas industry is a clear sign that executives are finally acknowledging that oil demand is likely to keep falling. As Shell's chief executive predicted three years ago, "forever down" could be the new normal for the oil industry.

However, the bulls may have the last laugh: continued underinvestment in oil projects could actually lead to a drop in supply, which could send oil prices soaring.