20 May 2020
- We continue to record signs of supply contraction upstream and the market is trying to price this relatively recent development in. There are also signs that inventory accumulation is starting to ease off. Once the storage situation is resolved (excess inventory absorbed by the downstream demand), we expect the prices to reflect more closely the newly established equilibrium. We will caution that the market is unlikely to experience rapid drop of inventory due to weak recovery in downstream demand and favorable Cash & Carry Arbitrage.
- The economic activity in Asia, Europe and even USA is gradually rebounding but this is happening from a very low base. Regardless, we see more refinery operating capacity coming back online to satisfy the come back of downstream demand. 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 constraints of this “new normal”.
- 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 (Brent) at $35. One of the most important components in our proprietary systematic fundamental model remains the Currency Impact Index. The data continues to suggest that further improvement in demand is likely on the back of rising purchasing power of oil consumers.