Is Oil Trading Against the Trend Today?

Last week, Saudi Arabia, the world's leading crude exporter, announced it will abandon its $100 price target as it plans to increase crude production in December. This decision adds to an already oversupplied market relative to demand, occurring at a time when West Texas Intermediate Crude is trading in the upper $60s. 
 
Despite this seemingly bleak situation for oil investors, there may be a bullish case on the horizon. The question remains: When will this occur, and how early should one invest? 
 
The drop in oil prices since last fall’s peak just below $94 per barrel has been primarily due to excessive supply compared to insufficient demand. With OPEC likely adding more supply soon, higher prices are only feasible if demand drastically increases. Will this happen before year-end? It seems unlikely given current economic conditions. 
 
Although falling interest rates in the U.S. might stimulate economic activity, any significant impact on U.S. demand over the next three months seems doubtful considering the lag-time between rate cuts and their effect on economies. 
 
Meanwhile, China’s central bank rolled out several monetary stimulus measures aimed at reviving its economy—currently second-largest globally—amid dwindling growth rates and investor confidence. However, whether these efforts can spark a new oil bull depends largely on whom you ask: OPEC, or International Energy Agency (IEA). 
 
Historically adversarial entities with different interests (OPEC representing energy producers versus IEA protecting consumers), both offer contrasting estimates of future energy demands influenced by their biases. 
 
Currently, though, we're witnessing unprecedented divergence between their forecasts for Q4 demand. The Wall Street Journal reports that while IEA anticipates an additional daily need of 900k barrels by 2024, OPEC predicts twice that amount. 
 
Henceforth arises another crucial factor influencing these predictions: Which version of China's economy will we witness during Q4? A deflation-riddled economy? Or one bolstered by Beijing's stimulus package? 
 
Should the latter prove true, while it may not push oil prices back to the $80s by New Year's, it could at least prevent a further drop in prices. However, betting on other short-term price drivers, such as potential disruption due to regional wars, seems risky and unreliable. 
 
Currently, oil doesn't seem like a promising investment for the short term, with its most negative positioning in 13 years, according to a Bloomberg Markets Live Pulse (BMLP) survey. However, this very pessimism might be indicative of an impending reversal in direction; traders often display extreme bullish or bearish sentiments at worst possible times. 
 
Supporting this notion is Brett Eversole from Stansberry Research, who points out that historically bearish sentiment precedes bullish returns. He mentions that following depressed Commitment of Traders (COT) readings—weekly summaries of futures traders' positions—average 12-month gains were around 62%. 
 
This gives us reason for optimism despite current bearishness. But what about long-term prospects? 
 
The key determinant remains supply-demand balance; currently skewed towards oversupply but likely won't remain so indefinitely. 
 
Occidental CEO Vicki Hollub suggests we'll face an oil shortage by end-2025 due to insufficient replacement of current crude reserves. Government policies discouraging heavy investments into new production amid climate change concerns are another contributing factor leading potentially towards high prices owing to tight supply. 
 
In conclusion: While today’s market conditions present strong headwinds against profitable trades in oil stocks, these factors will likely give way to significant tailwinds within roughly a year and three months’ time frame. 
Given the S&P's current lofty PE ratio and low dividend yield relative to Big Oil alternatives', longer-term investors can expect substantial profits when looking ahead beyond the next two years, even if these stocks trade lower in the coming months. 
 
However, momentum is decidedly bearish now, which calls for caution before jumping into immediate trades unless there’s more evidence of a reversal in trend. But the bigger picture suggests that today's bearish pessimism is setting up the stage for tomorrow’s bullish euphoria, making it an opportune time to consider oil investments for long-term gains.