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Crude oil has fallen back into a bear market.
The US benchmark of prices – West Texas Intermediate crude – on Tuesday logged a greater than 20% decline from its most recent high in May.
It may seem counterintuitive to be bullish on oil when the immediate problem is that there’s too much of it.
But for Neil Dwane, the global strategist at Allianz Global Investors, oil is going to remain a key ingredient that fuels the global economy.
“If you’re bullish on global growth, then you should be bullish on oil,” Dwane told Business Insider on Tuesday. “Oil makes the world go round. If you’re bearish on global growth, why is the S&P trading above 2,400? Give me a clue. There’s a lot of inconsistencies here.”
At the core of this argument is a disagreement with those who have called for the death of oil. As tech giants like Tesla invest in green, autonomous transportation, Dwane only sees this as transformative about a quarter of a century from now.
There are “so many industries where electric vehicles and Tesla might be interesting, but they’re just not for the foreseeable future,” Dwane said, pointing to a five-year horizon. “We just can’t change how we fly around the world or, arguably, how our trade is promoted on ships sailing across the seas. There’s an element of hype that needs to be stripped out.”
So, it’s a longer-term view of oil that’s a little different from what day traders react to tick-by-tick, such as headlines about OPEC meetings.
The most immediate issue that weighs on traders minds is that there simply is too much oil being produced and in storage. Bloomberg reported on Monday that oil-tanker storage rose to a 2017 high of 111.9 million barrels earlier in May, according to the tracking company Kpler.
That happened even though the Organization of Petroleum of Exporting Countries agreed to cut production from six months from January and extended the deal in May. And so, judging by the price action, traders don’t see OPEC’s cuts as being effective.
However, that should not change a bullish longer-term view on oil and the stocks of large producers, Dwane said.
If Asian demand for oil continues to be the fastest growing in the world, it could help balance the market, he said. Oil demand should look “fairly robust” to an investor who is even slightly bullish on China’s economy because the country would be needing more oil if it grows at about a 4%-6% pace.
“If you can get your brain around Amazon at $1,000 … certainly you can get your brain around oil at $45,” Dwane said. The August contract for WTI futures on Wednesday traded little changed, near $43.73 per barrel.
But a fair oil price that would incentivize investment in oilfields to produce the supply that’s needed within four years is nearer to the $65 to $74 per barrel range, Dwane said.