15 November 2019
- The supply tightness which appeared on the spot crude oil market in the last 6-10 weeks has finally materialized in stronger oil prices. The early signal was provided to us by our Forward Supply. The lag period of the price is 8 weeks. This is longer than the targeted 4 weeks forecasting window for Forward Supply which is not necessarily a negative outcome. The price will always respond to more than just supply for crude oil, yet we find that the influence on the crude oil price formation has increased substantially in recent weeks.
- Our short-term demand assessment has deteriorated further since our last publication. The negative trend of consistently lower demand emerged in the summer, but it accelerated during weeks #39-40. Poor refinery margins and WoW increase in idle refinery capacity are partly to blame. Poor margins during times of relatively low oil price only come to support the argument in favor of low underlying demand. Anyone too keen to watch demand for crude oil in recent weeks may want to consider that our proprietary algorithm quantifies the decomposition in terms of price drivers. These are broadly grouped as supply, demand and macroeconomic and displayed on the chart below. Evidently, demand is retreating at the expense of Supply and Macro.
- Our short-term macroeconomic view has improved significantly since our last publication. The change of heart came from better reading for our Energy Intensity Index (units of oil consumed to produce a unit of economic output) and some relief offered by the FX markets. The speculative positioning on the WTI market remains cautiously favorable to further price gains. This is traditionally a lagging indicator (coincidental at best) so not much focus is worth on it. What bothers us the most is the abnormally low for this time of the year short-term credit availability. This is not a good sign for demand in the short to medium-term.