Scraping the Barrel
Oil prices spiked after the Fed indicated they would keep their firefighting gear at hand, but then came off hard after nudging within an earshot of WTI $40. As we saw in 2008/2009, the path from central bank deluges to asset price inflation is initially dangerous and rocky with many wobbles before liftoff.
Oil prices have recovered from the inventory induced slide levels but are well off intraday highs. Oil traders appear happy to look through short-term inventory machinations – even more so as inventories at the all-important Cushing terminals fell and softened the blow from the nationwide oil inventory builds.
Since the beginning of May, strategically positioned oil traders have remained content to pocket dips, and likely more so this week, encouraged by OPEC+’s substantial commitment and resolve after the weekend meeting which, on the surface, seems solid enough to form the foundation of more constructive pricing.
OPEC+’s purposefulness has effectively put a plank on oil prices, providing significant wiggle room for the macro backdrop to fall into place.
The zig-zag price action this week is not that unexpected as this is a natural reaction to the speed of price recovery and the expected toil through 2020/21 of re-balancing the market, which was getting accentuated this week through the bearish to consensus inventory builds.
But there’s a lot of noise and inaccuracy in the data, especially around forecasts. The handful of oil analysts who make up the Bloomberg and Reuters forecast surveys were wrong again to predict a draw this week on the timing differences in imports vs. exports as the net imports are what drove this build.
Still, short term and fast money traders are very much inclined to short or take profits on any hint of bearish data while deferring to the Devil’s Advocate view that the principle of compensation will never happen.
The head of Nigeria's state-run oil company said that although Nigerian production exceeded its OPEC+ quota by 100kb/d in May, the country is quickly coming into line with the agreement and will cut production by 45kb/d below its quota in 3Q to compensate for overproduction so far. It will be necessary for OPEC+ to show full compliance as US production is expected to rise in the coming weeks in response to the oil price rebound.
While discipline from OPEC+ will help to limit oil price downside on a bearish signal from the US, a small pull-back is probably unavoidable if US production starts to increase too soon.
So long as increases in US production is due to the return of shut-in wells rather than an increase in new investments and drilling activity, the medium-term fundamentals suggest the market is moving back towards supply/demand equilibrium and any weakness in the oil price should prove short-lived.
A full recovery to early March levels will need continued supply discipline, demand recovery and time to work off inventories and spare capacity. That’s a tall order indeed and could be prone to less satisfactory results over the short term, as evidenced by this week’s bearish US inventory build.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll