25 June 2020
- The contraction of supply between March and late May, as discussed in previous research notes, has come to an end. The oil market has clearly entered a different phase, this time of supply expansion. Our proprietary weekly global crude oil supply model continues to suggest higher supply hitting the market during weeks #25-30. The divergence with the oil price should worry anyone overly optimistic for the well-being of the oil market. We are beginning to form the view that the renewed supply accumulation is the result of both weak demand-pull and renewed supply-push along the oil supply chain. The former is a function of the weak economic activity. The latter is a function of increasingly favorable market price vs. economics of extraction.
- The economic activity in Asia, Europe, and even USA is gradually rebounding but this is happening from a very low base. Plus, the threat from 2nd wave of disruption is very real. Regardless, we continue to see encouraging signs of some refinery operating capacity coming back online to satisfy the comeback of downstream demand. We would like to reiterate that it is unclear to us if this rebound is due to genuine return of demand or the economies are adjusting to the “new normal” and finding ways to somehow operate within the constrains of this “new normal”. Forward demand looks encouraging only for next week 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, there is evidence which suggests that credit is starting to expand in key consumption regions. We continue to expect credit to grow as economies re-open and the demand for credit lines from economic entities grows. Analysis of what drives the crude oil price in recent weeks reveals that the macroeconomic forces are back in fashion. The trend is displayed in the chart of the week, where we see that “Macro” accounts for nearly half of the oil price formation while supply and demand share the remaining half. It is therefore dangerous for anyone with a bearish S&D market stance but positive macro outlook to ignore the balance.