I guess when you’re all-in on a thesis – like many people are on the whole long crude, “demand is about to overtake supply” thing – you’ve really got no choice but to double down when the going gets tough.
It’s either that, or admit that you were probably wrong and that’s not something we, as human beings, enjoy doing.
So even as crude and everything tied to it dropped like a rock…
…and even as inventories hit (new) records and rig count rose for the 8th consecutive time to 617 (the highest since September 2015), the likes of Goldman and now BofAML feel the need to explain why all isn’t lost.
Here are a few excerpts from a BofAML note out Friday.
Oil Faces A Moment Of Truth
Prepare for steep backwardation in Brent and even WTI… Oil prices have tumbled in recent days as record US crude inventories have clashed with record non-commercial oil net length of 557 thousand contracts. Still, while US crude stocks are high, total OECD oil stocks dropped by 115mn bbls on a net basis in 2H2016 before OPEC cut production. Given our expectations of a global deficit of 575 thousand b/d this year…
…we expect a further 210 mn bbl total draw in 2017. Three dimensions to the ongoing global oil market rebalancing exercise blur the picture: a regional angle, a crude oil grade element, and a petroleum product rotation. With cuts coming from the Persian Gulf and US shale output growing again, Dubai crude prices have led Brent. WTI has lagged. Similarly, light crude oil prices have fallen relative to medium and heavy grades, while propane and butane have tightened ahead of diesel and gasoline markets.
…as US crude and petroleum product exports take off. Crucially, prices at the prompt for many crude and product markets have risen on the back of an expected or observed inventory drop, while long dated prices have continued to roll over across the board. This trend of lower long-dated crude oil prices should continue, as oil-on-oil supply competition in the US forces renewed producer hedging pressures. Still, the spot oil market may change direction very rapidly here. The key to the rebalancing of global oil markets is a surge in US oil exports, in our opinion, as it will help clean up the large North American surplus. The ramp up is already underway.
But to clear the global glut, Brent-WTI spreads at the prompt may need to widen further. With global oil demand still very firm, we still see spot oil prices moving higher.
Ok, so basically, despite this….
….BofAML’s conclusion is this…
With demand soaring, the shift from a highly overstocked market to a meaningfully undersupplied one could happen pretty quickly if our global oil supply-demand balances are correct. As we stated earlier, there is a petroleum product dimension to the ongoing oil market rebalancing that is already paving the way forward. And with global oil demand soaring, this shift could happen very quickly.
Well let’s hope so, because as discussed earlier in “‘Wait For Iiiiit…’ Crude’s Epic Collapse Is Warning Sign For Another Massively ‘Consensus’ Trade“, there’s a whole helluva lot of money out there betting on just such a shift.
Or, to illustrate the same point with different charts…
…we can’t afford anymore of this….
…or anymore of this…
As for this week, the message was clear to me, even it wasn’t to some observers. “I’m not sure whether it was the lack of U.S. inventory drop because of the cuts or the lack of a clear sign out of Houston that they will extend the cuts, which triggered the drop,” Gene McGillian, manager of market research for Tradition Energy told Bloomberg on Friday.
So while Gene may be confused, I’m not. And neither are you assuming you read the following which I wrote here on Wednesday when the wheels started to come off:
Sorry CERAWeek, talk is cheap these days. Data moves markets.