Title: Oil Has Turned a Very Big Corner — Consensus & Positioning, the Physical, the Fundamentals, and Trade Expression Show: Paulo Macro (Substack) — paid Guest: Paulo Macro ("Cloudbear") Date: 2026-JAN-28 URL: https://paulomacro.substack.com/p/oil-has-turned-a-very-big-corner Length: written post (no timestamps) Note: Back-filled post (processed 2026-JUL-07). Paulo's oil-bull origin note: he has begun accumulating a significant position in oil, believing a bullish trend has begun that will run for quarters or years. He walks through (1) how profoundly bearish the year-end consensus/sellside became (Goldman/DB/JPM sub-$55 Brent calls; John Kemp's survey clustered $55-65), (2) speculative positioning at a Lehman/April-2020 extreme (WTI+Brent managed money near $0 net long), (3) a physical market that does NOT confirm the bear (backwardated curves, firm Dated Brent), (4) fundamentals — IEA understating demand, US shale plateauing/NGLs padding "crude", OPEC spare capacity really 1-2mmbpd not 3-5, and (5) the optimal expression — front-month roll-yield via BNO (Brent) over USO (WTI) because of Trump crude-export-ban risk, or convex back-dated options. Body reproduced for personal study; Substack chrome removed, wording otherwise verbatim.
I have begun accumulating a significant position in oil. I believe a bullish trend has begun that will run for many quarters or years. Today I want to elaborate on why I think oil has turned a very big corner for an upside run, and how I am thinking about best ways to express this view in the context of risk management and limiting downside.
Consensus into the New Year
Positioning Has Reflected a Bearish Extreme
Physical Market Does Not Confirm the Bear
Fundamentals — Supply & Demand
What About Spare Capacity?
The Optimal Expression
Consensus into the New Year
The oil consensus view as we closed out 2025 hit level of bearishness that is hard for me to overstate. I elaborated on some signals in Quick Oil Charts a few weeks ago, but it is worth reviewing and elaborating on just how profoundly extreme this view became in 4Q25.
Goldman surveys its clients on a monthly basis, and nearly 60% earlier this month were bearish to some degree on oil — a level we saw exceeded only in April 2020 when WTI traded negative and Brent was trading below $20/barrel.
However the bearishness was not limited to institutional investors: the sellside was heavily bearish for weeks beforehand. A few examples…
Here is Deutsche from their mid-December outlook calling for oil Brent to average $55 in 2026 and lowering their 2027 outlook from $70 to $65. Their view is that OPEC+ will be forced to cut production by 1-2 mmbpd to manage the Brent price back to $65/bbl in 2H26.
Here's Goldman Sachs a day later, calling for Brent to average $56/bbl and WTI to average $52 in 2026.
Not to be outdone, JP Morgan's oil outlook published just before Thanksgiving called for a surplus of 2.8 and 2.7 mmbpd in 2026 and 2027, respectively, with Brent prices falling into the low $50's by 4Q26 and ending the year in the $40's, before averaging $42/bbl in 2027 and ending the year in the $30's. The consumption stimulated from such depressed prices and resultant production cutbacks would result in a $58 average Brent price for 2026.
Most fascinating to me was John Kemp (former senior energy analyst at Reuters), who hosts a 5-year forward oil price survey each year. Just last week, on January 20th, he released the results of his 11th annual survey covering the oil outlook for 2026-2030. The results were particularly notable given the diversity of respondents (see the last bullet point); I reproduce the results here in their entirety, with bold/italic emphasis is mine:
John Kemp's Eleventh Annual Oil Price Survey (2026-2030) — 20 January 2026
Key results:
Front-month Brent futures averaged $68 per barrel in 2025 down from $80 in 2024. Realised prices were significantly below the mean forecast at the start of the year of $76.
Prices are expected to fall further to an average of $62 in 2026. Forecasts are tightly clustered, with more than three-quarters of respondents predicting they will average between $55 and $65 in 2026.
Prices are expected to average between $60 and $75 throughout the five-year forecasting horizon, down by between $7 and $15 per year from last year's survey.
Forecasts remain tightly clustered throughout, but biased slightly towards the upside, particularly for later years, with a slight positive skew, which is more pronounced towards the end of the five-year horizon.
Forecasts have become more clustered over all time horizons, with uncertainty declining back to levels last seen before Russia's invasion of Ukraine, and in some cases several years before.
Analysis
Prices are expected to remain anchored near recent levels throughout the next five years, well below the long-term inflation adjusted average since the start of the century of $93.
Uncertainty and upside price risks caused by Russia's invasion of Ukraine and the U.S./EU sanctions imposed in response have disappeared as the market has adapted.
Upside risks from sanctions and conflict in the Middle East are balanced by downside risks from sluggish economic growth and the gradual shift away from oil-based transport fuels especially in China.
Extra production from the United States, Canada, Brazil, Guyana, Argentina and possibly Venezuela as well as OPEC⁺ is expected to meet increasing consumption comfortably for the rest of the decade.
Survey data
The survey, in its eleventh year, was sent to 15,000 recipients on the Best in Energy email list, with full or partial responses received from 657. The survey was open between January 13 and January 19, 2026.
Most respondents work in oil and gas (22%), banking and finance (15%), research (9%), professional services (9%), physical commodity trading (8%), other energy industries (8%), and hedge funds (7%).
Paulo again: To sum up the above, consensus is tightly bounded among bankers, financiers, physical traders, hedge funds, and research analysts with an expectation of oil going nowhere-to-slightly-higher…for the next five years.
Of course, the consensus would not be consensus without Jim Cramer opining from the retail side.
Positioning Has Reflected a Bearish Extreme
The bearish consensus has also reflected in positioning, something which I also highlighted in Quick Oil Charts. To review and expound further, in the 4th quarter as WTI crude was bouncing around $55-62, the non-commercial (speculative) net long as a percent of Open Interest fell to levels we had not seen since 2010 (when WTI was bottoming in the lower $70's).
Looking at the Managed Money category of speculators, when converting the net long position into a notional dollar exposure using the front month as a proxy, you can see that the WTI crude position went negative (i.e. net short, purple line below) in the fourth quarter for several weeks — a circumstance we only saw briefly in late 2008 as the financial world was ending following the Lehman bankruptcy. This was a time when a "super contango" emerged that forced Exxon and others to self-fund massive carry/floating storage trades as banks everywhere pulled lines to shore up capital.
Who remembers the supertankers sitting in the Gulf of Mexico/America earning deep double digit annualized IRRs for short-term in floating storage? For a little history, by the time Lehman filed in mid-September 2008, WTI had fallen from an all-time high of $145 in July to ~$90 (you can see the violent snap higher in the aftermath of the bankruptcy as trading went wild and both speculators and commercial traders were scrambling to cut positions). By November, the oil price was $55 on its way to a December low of ~$34.
This is what the WTI crude curve looked like in mid November (blue) and December (orange) 2008 as the global economy crashed, as self-funded floating storage required a steep financial incentive to park barrels.
Fast forward over a decade, when the infamous 20 April 2020 Covid episode saw WTI go negative, the super contango was indeed epic.
Compare this to late October 2025 (purple) and today (yellow), and don't forget to note the pricing on the right side where the curves are bound in the $58-64 range for WTI, $63-69 in Brent, and the fronts are actually backwardated.
Look again at the managed money chart above:
The bolded red line combines the WTI + Brent managed money category…that position fell to nearly $0 net long last quarter — a level we only saw in April 2020 because the WTI price went negative and flipped the sign in the WTI managed money segment as speculators found themselves flipped short as the oil price crossed the $0 bound into negative prints.
That is how negative positioning recently became: we needed another Lehman or Covid lockdown to justify the position traders were running several weeks ago. Lehman and Covid were quite literally priced in.
As an aside, a similarly bearish sentiment can be observed in oil equity flows. Last year saw the worst annual outflow from the $31bn State Street Energy Select Sector SPDR ETF (XLE) in history — it wasn't even close.
Now look at total fund assets for XLE, XOP (Oil & Gas Exploration/Production ETF), or OIH (VanEck Oil Services ETF).
For context, energy ETF assets as a % of all US equity ETFs are below 2020 lows.
You have to squint to make out energy's 3% of the S&P 500 market cap.
Physical Market Does Not Confirm the Bear
Despite this profoundly bearish positioning and sentiment, the physical market has remained as divergent as ever. I noted the backwardated curves above, but you can also see this in the persistent premium for Dated Brent (immediate physical delivery vs front month price), where the last time physical traded briefly negative was in October 2024 in the aftermath of the Hamas attack as Iran dumped over 40mmbbls of floating storage into China and swamped the market (Dated briefly touched -5c/bbl then). Since then, Dated Brent has remained firmly positive.
Notice also that in Brent, the 2m-3m (green) and 2m-5m (blue) timespreads remained persistently positive over the past few years, with a small exception in Oct 2025, Dec 2023, June 2023, and Dec 2022. The 1yr spread (red, denoted as a % of the barrel rather than $) has periodically dipped into a modest contango, but the long-term contango has been a modest fraction of the time over the past five years.
This is not the profile of a market that is rewarding storage, and yet the firm consensus view is that there is a flood of oil on water (primarily Iranian/Russian barrels) that will eventually land in storage, along with weak global demand growth that will be overwhelmed by Opec+ to the tune of nearly 4mmbpd of surplus in 2026 according to the IEA. I'm sure most of you know this tune, but the IEA has consistently underestimated demand in their balances ("missing barrels") which subsequently are revised higher many years later. These same official estimates are what the entire sell side starts with and takes as a baseline when you read the projections at the top of this note.
There is a difference between an analyst and a trader. One should ideally be both, but always remembering that The Market Always Tells the Truth — Even When It Lies.
Which brings us to supply and demand…
Fundamentals — Supply & Demand
Here is the infamous IEA chart calling for 109mmbpd of supply vs 106mmbpd of demand, and a ~4mmbpd surplus in 2026.
Putting aside a longer discussion on how IEA is likely grossly underestimating global demand (which on my estimates is looking somewhere in the 108mmbpd+ area for 2026), and focusing strictly on supply, I'm going to hand off to my friends at HFI Research who wrote an excellent note last week to address the oil-on-water and inventory situation with which the market has been concerned, and they were kind enough to update those charts using the latest Kpler data out this week. Used with their permission (I am a big fan of their work and encourage you to check them out).
As we can see, Oil-on-Water did in fact rise in 4Q…
…so naturally Global Onshore Crude + Oil-on-Water also rose:
…but Global Onshore Crude Stocks (ex-products) barely rose by maybe 70mmbls in 4Q, and a grand total of ~4% over the course of 2025:
Chinese crude rose ~50mmbls in 4Q…
…and Global Onshore Crude Excluding China is pretty much back to where we were in October.
As you can see, most of the floating barrels land in China which has built significant onshore storage capacity in recent years (a substantial portion sits underground in caverns and out of the reach of satellite data). Keep in mind China is estimated to bring on another 250mmbbls of storage capacity in 2026 (that's ~700kbpd just to fill those tanks and keep current fill percentages flat). Excluding China, global onshore crude inventories are only higher by ~70 million bbls YoY, and the elevated oil-on-water has not translated to visible onshore crude inventory builds. Even the IEA notes that OECD oil inventories remain low relative to historical averages.
If there is one thing China loves, it's a sale. The fear here has been that China may stop buying, and then the bottom would fall out of the crude market. But what good is new storage capacity if you don't plan to fill it? Of course China might slow the pace of their buying at $90 vs $60, but the fact is they are buying. I want to buy what China is buying and needs to buy.
What About Spare Capacity?
Starting with the US, long-time readers will recall I started warning about an impending plateau in US crude oil production back in 2024 as US Tier 1 acreage was long past the midpoint of exhaustion and associated gas/NGLs were showing an emerging trend of becoming a bigger portion of production out of shale patch. Since then, several oil market participants including my pal Tim Dallinger have increasingly questioned the DOE's US crude production figures, claiming they are overstated (October for instance saw the fifth consecutive month of downward revisions to shale crude production). Mike Rothman of Cornerstone has repeatedly highlighted an unusual gap between shale crude production and the separate DOE data for total US crude output. Note that US oil supply consists of crude, NGLs, refinery processing gains, biodiesel, fuel ethanol. NGLs (natural gas liquids) are a major part of "oil supply" — but they are not crude. As Rothman explains it:
Most NGLs are sourced to "wet" natural gas production — well flows run through a lease separator with methane split off to become "dry" gas supply and the liquids siphoned into "oil" supply. NGLs are not mixed with crude for refining because there's no separation by molecule size into various streams in the distillation tower like we have for crude. NGLs go in and then come out as is (think of it like a kid swallowing a quarter — a quarter comes out, not five nickels). Because of the distinct characteristics of NGLs, output numbers are always listed separately in production data...or at least they are supposed to be.
US shale crude accounted for most all non-OPEC supply growth over the last 15 years, and US NGL production has actually grown faster than US crude. This reflects back on shale natural gas' expansion, wells for which have a materially longer life expectancy than its crude counterpart (a shale gas well can produce for up to 25 years while a shale oil well is largely spent after 5 years).
We sense the DOE is including a small volume of NGLs into crude production effectively overstating 914 numbers. We contacted the DOE directly about this issue but have not heard back. (October 2025)
As Rothman mentioned, US shale — and specifically the Permian basin — is crucial to the global supply growth story because non-Opec supply growth since 2010 has been nearly entirely sourced from US shale (+5mmbpd since 2015). Is there plenty of Tier 2 acreage available? Sure. But with shale breakevens running in the $56-61/bbl range, it is going to only come at a higher price. How is shale even able to replace steep declines if Deutsche, Goldman, and JP Morgan are right that crude will average $50-55 in 2026?
These charts from BofA a few weeks ago shed light on US shale (the last two show you how production growth in the Permian has flattened out and is now starting to roll over).
What about non-Opec ex-US shale? Yes — Brazil, Guyana, Canada, Norway, and a few others have grown production, but those players and the US are expected to contribute a combined ~1mmbpd annual growth in 1H26 before flattening out in the 2H26 according to the IEA's own numbers.
In any case, the non-US, non-Opec growth of a few hundred thousand barrels is modest in the context of global demand growth, and it pales in comparison to what US shale contributed to supply growth since 2010.
Which leaves us with Opec+. Many readers will know I have been deeply skeptical of the prevailing view that Opec has 3-5mmbpd of spare capacity. Exhibit A is that every time Saudi runs above 10.5-10.7 Mmbpd, they draw down onshore stocks (they are currently running around ~10).
HFI Research ran a detailed assessment of Opec's capacity audit in early December, noting that only Gabon, Libya, UAE, and Kazakhstan are producing above their peak production rates attained in the 2013-25 time frame, and 17 of 22 Opec+ countries achieved their peak before Covid. The Opec+ production capacity report due in 3Q26 should confirm what some observers are already sensing in the production numbers: spare capacity is far less than consensus, and the market is sleeping on this (note HFI thinks Saudi peaks out around 11mmbpd, and I live a little lower at ~10.5-10.75). So that's 500k-1mmbpd of spare from Saudi. When you throw in another ~350kbpd of spare from UAE, ~150kbpd from Kazakhstan, and ~250kbpd from assorted others (Algeria, Iraq, Kuwait, Oman, etc), the real spare available is somewhere in the 1-2mmbpd range — exactly the range I have been working with for the past two years — and Saudi accounting for the majority of that spare capacity.
The bears will flag that regions like Guyana or Namibia have growth, Libya just needs some investment, offshore has growth potential, but these growth avenues take time and again, they don't move the needle. On the flip side, the disruptions to the crude market are proving significant and persistent. The Kazakh production knocked offline in the Black Sea from Ukrainian drone attacks earlier this month cost the global market ~5 million barrels. That may not sound like a lot, but it works out to just under 15kbpd annualized, or ~170kbpd over the month of January. Then there is the decline in Russian production which is finally being impacted by the departure of Western firms and especially by disruptions from drone attacks… as they say, a million here, a million there — pretty soon you're talking about real barrels.
The bits and pieces of incremental growth are at risk of not keeping up with the global demand growth story, particularly that of non-OECD where countries like India which are hitting per capita S-curves of greater energy intensity (see India products consumption up double digits in late 2025). And remember that for Chinese storage fill rates just to stay flat, they have to import an additional +700kbpd this year.
On top of the above fundamental story, we have the specter of "one-off" externalities like greater-than-expected product draws from a historically cold winter in US and Europe, and the risk of a Middle East conflict that is now starting to get priced back into the barrel.
The Optimal Expression
Regular readers and listeners of some of my podcasts will recall that I have some reluctance in expressing a bullish view via oil equities since they have run a lot vs. the oil price, particularly since Liberation Day where oil is barely up and many equities have rallied deep double digits. In fact while the Brent flat price is -10% over the past two years since 1 January 2024, the oil equity ETFs are up double digits in the case of XLE and OIH, and nearly flat in XOP.
Using BMO's comp table for reference, you can see in the far right column that on a P/NAV basis using the current futures strip, the US majors, largecaps, and smidcaps are all trading at or well above NAV, with FCF yields of 6-7% for the majors, 10-11% for the largecaps, and 12-17% for the smallcaps on 2026-28.
Unlike junior base metal miners where, for instance, many copper players are still discounting long-term prices in the low $4's (well below the street's long-term ~$5/lb price assumption and a spot price closer to $6) — and therefore trading at significant discounts to NAV — most oil plays are clearly not in the same position with a large margin of safety to the strip. While the equities can certainly be expected to rerate significantly with an oil rally to $90, I still can't say that prices in the screen are extremely cheap at the current strip. So perhaps a better way to play is via a convex expression on the oil price itself (equity-like returns via options), or at least as a complement to cheap single stocks. There are two issues with commodity options here though.
First, with options on futures I am married to a spot on the curve. As we saw with the Iran bombing in June, a geopolitical trigger will roof the near-term oil price, but if I am sitting two years out in Dec 2027 futures options, my calls' implied volatility may inflate some and give me a bit of appreciation, but I don't really benefit from a bullish move unless the market trends over time in my direction as I get closer to expiry — so the convexity is loaded on the back end of the trade (and who knows what 2027 looks like), whereas presumably a basket of equities will work immediately as I watch them run and miss out. For instance I've had Dec27 WTI 50% OTM calls for a few quarters with the expectation that a "glut" narrative in 2025-26 would eventually be worked through, and 2-3 years gives me plenty of time to let the oil market adjust and for prices to go on a run. As we get through 2027 and are on the other side of The Superglut, futures will backwardate more steeply as the flat price rallies and allow me to eventually "ride up the curve," bringing those options into a multi-bagger after sitting in the back of the book for two years (but without the same downside risk of equities if there is an oil collapse — the calls go to zero, but they are sized for fixed loss and convexity). Again, the problem is that if oil goes on a brief run or has a geopolitical pop, I don't really capture any of it being out on the curve.
So the real risk is that the consensus will move from Superglut to Glut to Kinda Balanced to Whoa We Are Drawing much sooner than even I expected in 2026, driven by weak-USD growth in emerging markets (and perhaps helped along by weather and geopolitical "one offs"). In other words: that the oil market has already turned the corner. In the event that oil starts to trend higher, even moving into Dec2026 may leave me behind as the backwardation steepens. I want to be in the front and ride what I think is an oil market that has turned.
The added advantage is that as the backwardation steepens, a simple passive long futures strategy collects the "roll yield" which juices the return of the flat price. While there is less leakage in futures, the ETFs USO and BNO basically do exactly this by holding the front month WTI and Brent contract, respectively. The fees are not great at 70-90bps, but if you want to "set it and forget it," this gets you long the front month and accretes the roll yield to NAV when the curve is in backwardation (ie they sell the front month as expiry approaches and buy the 2nd month at a lower price, collecting the difference if the oil price doesn't move over time or "riding up the curve" — this is the roll yield). As the backwardation charts above showed, we have been backward in the front months the vast majority of the time over the past few years. The risk to the strategy (beyond a decline in the flat price) is that the opposite of course holds true — when in contango, the NAV of the ETFs is detracted by the roll cost.
This point on the roll yield is actually something that bothers me while reading very vocal oil bears on social media. Setting aside that if you were short in 4Q at some of the most bearish extremes in history (remember positioning was basically pricing like Lehman or Covid, so if those events didn't happen, bears were almost sure to lose money), notice the difference between the Brent oil price and "being long the front month oil future" via the BNO ETF over the past four years.
Above you can see the run in Brent from $80 to $127 in early 2022 on the invasion (red line), followed by a multi-year slow bleed back to $60, for a loss of -25% over the period. However if you had held the BNO ETF (white) as a proxy for owning the front month Brent future and rolling the position each month upon expiry, you would have been up +50%. Even if you were the ultimate contra and unfortunately bought Brent oil at the post-invasion highs (which fell over -50%), a passive front-month roll strategy like BNO — even if unfortunately timed at the 2022 highs — would have lost you -13% to today. My point is the backwardation saved you, and that is a cost that the bears had to pay.
So what exactly are the bears celebrating these past few years?
The second problem with options is that after the recent rise in Iranian tensions, implied volatility has once again jacked higher to nearly ~50, and I would much rather be buying options when vols are in the 25-30 range and nobody is thinking about oil (as discussed in July 2024 — see here).
In the case of BNO the Brent ETF, while I don't love the fee drag and there is slippage given wide quotes for options which requires some finessing on entry execution, the ~30-delta calls expiring out 6 and 12 months are implying mid-30s vol, which while above the 50/100day realized vol in the 25-30 range, but it's also not terrible when you consider the prospect of an accelerating roll yield that would also accrete to NAV as the physical market tightens in addition to the flat price trending higher.
In fully considering risks to a trade and "Unknown Unknowns," I am concerned that if the oil price were to rally and get away from the Trump administration (and we know if there is one thing Trump abhors, it's a higher oil price), I cannot rule out Trump reinstituting the US crude export ban. Some may not know this, but there was a time when most US crudes could not be exported (dates back to the Energy Policy and Conservation Act signed in 1975 in the aftermath of the 1973–74 Arab oil embargo). The oil glut and shale bankruptcies last decade forced the issue, and ironically it was President Obama who repealed the export ban in 2015.
My buddy Le Shrub likes to say it's all a joke anyway and "once you realize it's all nonsense, it starts to make sense." We also have Occam's Razor: the simplest explanation is usually the correct one. I will now build on Shrub and Occam's work by creating "Shrub's Razor" in his honor:
Shrub's Razor is a philosophical trading principle whereby the funniest, most absurd outcome is also the most likely one.
In this case, Shrub's Razor suggests that Trump instituting de facto domestic oil price controls with a crude export ban would be truly hilarious since he is supposed to be the most pro-free market President in history, and it was a Democrat proponent of renewable energy and energy regulation who repealed the export ban a decade ago. Therefore a Trump crude oil export ban is the most likely outcome if the oil price rallies hard.
The catch is, if oil goes up a lot and Trump bans US exports, I want to be long East of Suez barrels, not US barrels. And that means BNO (Brent), not USO (WTI).
Of course, I'm open to suggestions among in single stock equities as well, particularly if they are cheap. I really liked my pal Kevin Muir's take on Canadian oil companies as a big opportunity right now (in case you don't subscribe already to him, Kevin has graciously shared a private link to access his energy note which you can find here — but I encourage you to consider subscribing to him!).
And if US oil companies have to deal with intervention risk from Trump, that's another reason to be long non-US/international oil producers over US names. Canada, Latin America… you get the idea.
Random Thought on Oil Market Liquidity
As parting food for thought, I will leave you with a page from an RBC report three years ago, with a highlighted passage regarding what could happen in extremis should we see a significant rupture (e.g. an Iranian war that lasts longer than a weekend). Worth a read and some reflection.
As always, there is a meme for this.
Stay frosty out there! As always, kindly yours,
Paulo aka Cloudbear