Oil: What Does The Market Know That We Don't?

For those of you scratching your head on the dismal price action in the oil market, you are not alone. The last time we saw such dismal price action was in late 2018 and the middle of 2019. In both scenarios, macro headwinds and unwinding trader positioning contributed to 1) illiquidity and 2) heightened volatility.

But like all things markets, we can approach it in two totally different ways. On one end, we can just say that the market is irrational and volatile, and with time, all things will pan out (e.g. revert to fundamentals). On the other end, we can try and understand why the market is behaving the way it is, react, and position ourselves accordingly.

From my experience, I have always navigated the markets better when I take the latter approach. The first approach has always led to dismal returns and emotional anguish. While in the grand scheme of things, I was eventually proven correct to hold steadfast, I would reflect and say that the emotional torment was not worth the pain.

Now that we are taking the latter approach, ask yourself this simple question. We had two bullish news items over the weekend with one bearish one:

• The Iran deal looks to be getting further from concluding.

• OPEC+ symbolic production cut.

• China COVID lockdowns continue.

The market initially jumped on the light trading volume, but when markets opened back up, prices quickly fell. Why?

In addition, Brent timespreads are weakening. Why?