24 March 2020
- Crude oil supply remains high which is duly reflected by the prevailing market price. Having said that, our crude oil analytical platform is starting to identify changes in the underlying supply-side conditions which are likely to lead to price stabilization, and ultimately price increase. One example is the strong incentive to accumulate inventory and carry same. This is because the trivial return on storage model indicates one of the steepest cash and carry arbitrages ever recorded in our database. The steep contango is clearly the single most influential variable in the model at this point of time. We find it hard to believe that key market participants will remain indifferent to the opportunity.
- It is difficult to be bullish demand at the time when 20% of the global population is restricted in its movements. The difficulty of the refiners to carve out any margin during this environment of historically low oil prices is self-explanatory. Forward demand is still pointing towards very different picture as we notice abnormally high intensity of buying on the physical market and contraction in the idle refinery capacity. It is difficult to assess at this point if this activity is down to speculative accumulation of inventory (market structure incentivizes such thoughts as discussed earlier).
- Our short-term macroeconomic view remains strongly bearish. The signals from our FX model continues to imply downward pressure on the price thanks to growing incentive of the producers to push more oil to the seaborne market. Data like this makes us question the real motives behind the apparent price war between Russia and S. Arabia. It is too early to celebrate the emerging trend of reversal of our proprietary FX Impact Index.