MacroVoices #239 Art Berman: U.S. Production still set to decline…but so is demand

Episode Summary

Executive Summary: Macro Voices episode 239 centered on oil’s near-term uncertainty and a longer-term bullish setup. Eric Townsend and Art Berman agreed U.S. shale faces a lagged production decline, but Art argued weak demand, OPEC+ spare capacity, and China’s influence could delay any price spike. Patrick’s post-game emphasized the reflation trade may be stalling as the dollar strengthens and commodities soften.

Main Topics: Oil market outlook and the Q4 production/demand balance (Priority: 5/5): Eric revisits Art Berman’s June call that U.S. oil production would fall sharply in Q4, but Art now stresses that weakening demand may offset supply declines, pushing any bullish price impulse further out. U.S. shale decline mechanics and rig-count lag (Priority: 5/5): Art explains that shale production responds with a long lag to rig count changes, meaning low drilling activity in 2020 should eventually reduce output, but not immediately. Crude inventory moves and short-term WTI technicals (Priority: 4/5): Eric discusses the latest weekly inventory draws and argues WTI remains vulnerable to further downside toward the low-$30s unless production falls first. Dollar direction as the key macro variable (Priority: 4/5): Both the market wrap and Patrick’s chartbook treat the U.S. dollar as central to macro pricing, with the contested election and Fed response creating a potentially volatile setup. Gold, silver, and reflation trade fatigue (Priority: 3/5): Gold and silver are analyzed as potential indicators of whether the reflation trade is still intact, with key technical levels used to judge whether the recent bounce is just a pause or a new uptrend. Bond yields and inflation expectations (Priority: 3/5): The 10-year Treasury yield is presented as range-bound near 70 bps, while 30-year break-evens are watched for signs that commodity weakness or dollar strength is feeding back into inflation pricing. China’s role in oil price formation (Priority: 4/5): Art argues China has acted as a major swing buyer and product exporter, helping drive oil’s rebound and potentially capping prices by adjusting imports and exports.

Key Arguments: Art Berman maintains U.S. shale production will still decline materially because the rig count is far below what is needed to sustain output, but he thinks the timing of the decline is later than June expectations suggested. Demand is the bigger change versus June: U.S. petroleum consumption recovery has stalled since early August, with diesel and jet fuel especially weak, which implies economic damage and slower oil demand recovery. A full oil price spike requires both recovering demand and a shale response lag; because drilling and completion take months, the market could see a sharp upward move only after a clear economic reopening signal. Eric Townsend argues WTI could still retest the low $30s in the near term if demand weakness dominates, but a sudden production drop could push prices back above $50 quickly. The reflation trade appears vulnerable because the dollar may have bottomed; a stronger dollar tends to pressure commodities, credit-sensitive assets, and inflation expectations. Comparative inventory remains useful, but the market’s perceived urgency has fallen as spare OPEC+ capacity and low-demand conditions make supply disruptions less price-sensitive. China’s buying and product exports have become an important counterbalance to OPEC+, shaping both the crude drawdowns and the recent softening in price momentum. Patrick’s chartbook suggests the recent bounce in equities, commodities, and precious metals may be only a pause within a broader corrective phase unless the dollar weakens again.

Data Points: WTI prompt/near-term technical level: $36.12 - Eric cites the 34-week moving average as a key downside trigger for WTI. WTI short-term downside target: $30 to $33 per barrel - Eric’s near-term bearish target if crude closes below the 34-week moving average. WTI support/resistance threshold: Below $1868 or above $1950 - Gold technical levels Eric says would signal either deeper correction or a renewed bull trend. Gold bounce level: Around $1900 - Gold rebounded from the prior week’s decline toward $1850. Gold downside target: Around $1800, potentially $1750 - Eric’s desired buy zone and possible downside if gold closes below 1868. 10-year Treasury yield: Around 68-70 basis points - Eric describes the yield as stuck in a very tight range. U.S. crude inventory change: Down 2.0 million barrels - Weekly crude inventory draw cited by Eric. Strategic Petroleum Reserve draw: Down 1.8 million barrels - Added to the weekly crude drawdown total. Total crude drawdown: 3.8 million barrels - Combined crude and SPR drawdown for the week. Cushing inventory change: Up 1.8 million barrels - Oklahoma storage build during the week. Gasoline inventory change: Up 683,000 barrels - Weekly gasoline build. Distillate inventory change: Down 3.2 million barrels - Weekly distillate draw. U.S. crude production: 10.7 million barrels per day - Eric says production was unchanged from the prior week and pre-storm levels. Tight oil horizontal rig count: 143 rigs - Art says this is the end-of-August rig count in tight oil horizontal plays. Prior tight oil horizontal rig count: 613 rigs - Art compares current rigs to November 2019 levels. Rig count needed to sustain production: About one-third of current need implied - Art argues current activity is roughly a third of what’s needed to maintain around 11 mb/d U.S. production. Weekly petroleum product recovery: 55% recovered - Art says total product supplied is about 55% recovered versus the low point. Gasoline recovery: 83% recovered - Art cites gasoline as the strongest recovering product category. Diesel recovery: 60% recovered - Art highlights distillate weakness as a sign of economic stress. Jet fuel recovery: 27% recovered - Art says kerosene/jet fuel remains deeply depressed. U.S. crude imports: About 6 million barrels per day - Art references the ongoing need for imports even with domestic production declines. OPEC+ withheld supply: 7 to 10 million barrels per day - Art says this spare capacity can offset U.S. shale declines. Oil price levels on prior move: WTI rallied to about $43-$44 and then fell back below $40 - Art describes China-driven buying followed by a sentiment-driven reversal. Yield curve / comparative inventory sensitivity phases: Red, blue, and green regimes from 2013-2020 - Art explains how market price sensitivity to inventory has flattened over time. 2018-style market correction reference: 11% drop over 14-18 trading sessions - Patrick compares the current S&P 500 correction to late 2018. S&P 500 possible downside level: Around 3,000 - Patrick says a deeper corrective move remains on the table. Euro resistance level: 1.18 - Patrick says a move above this would weaken the bearish dollar thesis. Silver technical level: $25 - Patrick watches this as a key level for the precious metals bounce. Bloomberg Commodity Index trend: Series of lower highs and lower lows since late August - Patrick argues the commodity reflation move may have topped. 30-year break-evens: Around 1.78% - Patrick says this inflation expectation measure is bouncing but could roll over if commodities weaken further.

Pivotal Quotes: "I think we're definitely in for some volatility by year end. in one direction or the other, driven by what I think is almost an assured contested election." — Eric Townsend: Eric’s macro framing for equities and risk assets at the start of the market wrap. "You can't produce oil if you don't drill wells." — Art Berman: Art explains why depressed rig counts eventually translate into lower shale production. "That, I think, is going to be one of the single biggest things to watch." — Patrick Serezna: Patrick on whether the euro can reclaim 1.18 and invalidate the dollar topping pattern.

Implications: Near-term oil and commodities may remain range-bound or weaker if demand keeps softening and the dollar firms. Longer term, a delayed shale response could still set up a sharp oil spike once global activity fully reopens.