What Are My Concerns Today For The Oil Market?

With WTI rising to $80/bbl, it's essential for us to list all of the reasons that could prevent prices from going higher. We can use these indicators as signposts to avoid potential pitfalls.

While the recent price strength is long overdue, we see a few obstacles still in the way of much higher prices in the near term:

• Tightening physical oil market conditions, but more is needed.

We have seen a material tightening in the physical oil market since the beginning of July. With the Saudi voluntary cut likely to last into year-end (please refer to our write-up), we think further strength in backwardation is needed to both 1) entice financial speculators back into the market and 2) entice more inventory draws.

Backwardation needs to increase to a level where it makes no sense for traders to hold oil inventory. At these spread levels, this is not enough, and another key reason why we are not seeing much higher oil prices.

For readers, if backwardation continues to increase, then you know one of those obstacles is going away.