The crude oil tanker ‘Devon’ sails through the Persian Gulf towards Kharq Island to transport crude oil to export markets in the Persian Gulf. (Photographer: Ali Mohammadi/Bloomberg)

Oil’s Rally Isn’t Over Yet

(Bloomberg Opinion) -- Put down that chart and look around you.

West Texas Intermediate crude suffered its sharpest fall in three months Tuesday, slumping as much as 5.5 percent after the contract slipped below its 200-day moving average for the first time in a year – a negative signal for technical analysts. Brent did the same thing on the choppier 50-day moving average.

Oil’s Rally Isn’t Over Yet

When combined with some supply-happy words from Saudi Arabia’s energy minister and expectations of a substantial inventory build in the U.S., that action was enough for many to conclude the rally is dead.

Still, oil’s end-users don’t pay nearly as much attention to y-axes as its traders do, and there’s ample reason to doubt that they’re done buying yet. While rising crude and falling emerging-market currencies over the past year have led to signs of oil-shock conditions in some countries, demand is still remarkably resilient.

Take China, which edged ahead of the U.S. this year to become the world’s biggest importer of crude. Seven of its eight record months for oil imports have been over the past year. India (which overtook Japan in recent years to become the number three importer) just notched the same record, despite soaring product prices. New Delhi even cut taxes on gasoline and diesel earlier this month.

While demand for high-speed diesel – the most popular fraction of the barrel, used to power India’s ubiquitous two- and three-wheelers – was down marginally from a year earlier in September, consumption of gasoline for cars and LPG for cooking continued to climb. If you can detect a major trend-break in this chart, where we’ve tried to smooth out the volatility by looking at the year-on-year change in trailing three-month demand, you’ve got better eyes than me.

Oil’s Rally Isn’t Over Yet

Many of the conditions that set up oil’s rally in 2018 remain in place, and won’t dissipate until well into next year. The spread between West Texas Intermediate crude in the U.S. onshore Permian basin and its main pricing point in Oklahoma has narrowed sharply from its levels a few years ago. That suggests the glut in the Permian is easing, but it may be more a result of slowing output growth than the expectation that the shortage of pipeline capacity to get crude to coastal ports is over. Looking at forward spreads into 2019, the gap doesn’t really narrow until the second half of the year. As a result, the main source of oil-supply growth in recent years is still largely segregated from the global market.

Oil’s Rally Isn’t Over Yet

The other reasons to be cheerful about supply look equally shaky. All the extra oil that Saudi Arabia, Iraq, Kuwait and the United Arab Emirates have pumped between July and September would have failed to offset the collapse in output from Iran and Venezuela were it not for two often-overlooked countries: Nigeria and Libya. Both have a nasty habit of letting their unstable politics put a dent in production, and both have elections scheduled in the coming months.

Oil’s Rally Isn’t Over Yet

Even if nothing goes wrong there, Saudi Arabia itself is probably running closer to capacity than it has in decades. The country likes to have about 1.5 million barrels a day to 2 million barrels a day on hand, but stabilizing the market amid the loss of Iranian and Venezuelan output means that glass is already broken. There’s now only about 2 percent of global capacity in reserve, according to the International Energy Agency, and the figure is shrinking.

It’s still possible that the world rides out this latest supply-demand mismatch and heads toward the landmark of 100 million barrels a day of demand without prices spiking again. But for that to happen, everything has to go right on the supply side, and the demand side needs to start showing signs of a fatigue that we haven’t seen so far. Don’t count this rally out just yet.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

©2018 Bloomberg L.P.