10 June 2020
- Ever since late March we have kept recording signs of supply contraction upstream. The market has to duly notice. The situation has changed in recent weeks as our proprietary weekly global crude oil supply model continues to suggest higher supply hitting the market during weeks #23-30. The divergence with the oil price should worry anyone overly optimistic for the well-being of the oil market. It is difficult to understand at this point in time if the expected supply accumulation will be the result of weak demand-pull or renewed supply-push along the oil supply chain but either is likely to cap further price gains.
- The economic activity in Asia, Europe, and even USA is gradually rebounding but this is happening from a very low base. Regardless, we continue to see encouraging signs of some refinery operating capacity coming back online to satisfy the come-back of downstream demand. We would like to reiterate that 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”. Forward demand looks less encouraging which is the likely indicator of weak recovery/demand trend well into June and July.
- The macro environment for crude oil has also improved but there are reasons to remain concerned. On the positive side, some evidence suggests that credit is starting to expand in key consumption regions. The rate of credit creation is not in accordance with the suggested rate by many governments and/or central banks around the world. Hence demand remains suppressed, which is partially incorporated into our Demand view discussed above. Regardless, we continue to expect credit to grow as economies re-open and the demand for credit lines from economic entities grows. 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 will be eroded by the FX markets.