14 May 2020
- We continue to record signs of supply contraction in the first part of the supply chain. Due to the well studied storage constraints (mainly a US problem), the focus of the market is currently on the downstream supply chain. There are early signs that inventory accumulation is starting to ease off. Once the storage situation is resolved, we expect the prices to reflect more closely the newly established equilibrium. The market is unlikely to experience rapid drop of inventory due to weak downstream demand and favorable Cash & Carry Arbitrage.
- We find it difficult to identify any meaningful bullish for demand development. It is true that the economic activity in Asia, Europe and even USA is gradually rebounding but this is happening from a very low base. It is unclear to us if this rebound is due to genuine come back of demand or the economies are adjusting to the “new normal” and finding ways to somehow operate within the constrained environment. It is not a good sign that refinery margins slipped during the oil price rebound in the last 3 weeks. This is a sign of a struggle to pass such modest feedstock increase downstream.
- The macro environment for crude oil remains bearish in the short-term. This is largely down to the negative demand shock experienced in recent months. Last time we wrote: “…the forward-looking nature of the futures market suggests that soon there will be an attempt to price in the return of the pent-up demand.” A considerable part of this price-in effort is now complete with oil at around $30. One of the most important components in our proprietary systematic fundamental model remains the flow of short-term credit. The data continues to suggest that the abundance of credit committed through the various channels of monetary and fiscal policy is still not reaching large parts of the supply chain. In fact we estimate that credit continues to contract.