Deciphering The Global Oil Market Landscape
Deciphering The Global Oil Market Landscape
To gain sanity in the oil market today, you need to look at everything without any emotional/cognitive biases. First, we need to ask ourselves a few questions:
Is the recent oil price sell-off warranted?
What is the expected price range for oil?
What should energy stocks trade at relative to expectations on oil?
How should one manage risk with the above 3 questions in mind?
Sell-off Warranted?
Looking at the latest data, the oil sell-off since the start of April was warranted. We saw peak physical oil market tightness just ahead of global oil inventory builds and financial positioning got stretched. Following the decline in refining margins, it was up to the market to determine just where that floor was. Was it $77? $78? We don't know, but we can guess based on fundamentals just where that floor should be.
Given where the 3-2-1 crack spread is today, I would say that the weak refining margins support the current sell-off.
As a result, if you think this sell-off is an exaggeration, I have bad news for you. It's not.
Now there's an important distinction to be made between recognizing that this sell-off is warranted versus what we expect going forward. Just because we think fundamentals support the sell-off doesn't imply that we agree with the market's expectations going forward.
Looking at the various crude timespreads, the sudden disappearance of backwardation was a short-term event likely caused by quant funds exiting in unison.
We are starting to see a v-shape recovery in timespreads, which should go a long way in stabilizing crude prices around here.
Lastly, from a storage standpoint, the build we are seeing in the US is undoubtedly bearish.
I think for anyone to say otherwise is fooling themselves of the fundamental reality. Looking at total US liquids, you can see the bearish balance change in Q2. What's surprising about the latest build is that the entirety of the build came in just 2 EIA oil storage reports. So while it's early to say that this is going to be a trend, the market is right to push oil prices down especially considering the potential of more supplies from OPEC+ starting in October.