Let's Slow It Down And Think A Little Longer Term Here

Oil price volatility masks the bigger picture.

Oil prices are all over the place. Monday sees a sell-off of 4% only to have the losses erased the next day. If you are trading the oil market on a daily basis, then you are in heaven, but for most investors, these daily gyrations are getting a bit old. But daily fluctuations of this magnitude encompass more of the market's emotions rather than the longer-term outlook, it's best to sometimes step away and look at the longer-term picture.

IEA published its latest oil market report today and in it, it had balances going to the end of 2024. With the OPEC+ agreement in place to the end of 2024, IEA can now assume no policy change and what this will do to oil market balances.

Source: IEA

And looking at this chart, IEA is assuming a 2 million b/d deficit into year-end. In 2024, it assumes flat balances in H1 with hefty draws returning in H2 2024.

These oil market deficits are unsustainable. To put it in absolute terms, ~2 million b/d deficit in H2 2023 will amount to ~366 million bbl draw.

Now if you put that in the global observed inventories chart, we would be at a new low. Clearly, either IEA is incorrect on its balance, or something has to give. Either China needs to start releasing its SPR to combat escalating prices or demand destruction needs to take place because of higher oil prices.

But am I getting ahead of myself here? 

No, I don't think so. There are a few reasons why I'm going to be a contrarian here just as others start to revise down their oil price targets.