Well they’ve got moxie, there’s no denying that.
Oil longs have been confounded of late by the market’s sudden propensity to price in bearish fundamentals. It’s been amusing to watch as sell-side desk after sell-side desk tries to explain away soaring US production, record stockpiles, and a rig count that’s the highest since September 2015.
A couple of weeks ago, we saw crude collapse 10% in the space of like four days, and that led directly to the largest outflows from high yield on record…
…widening HY spreads (both cash and synthetic)…
…and also served to exacerbate jitters about a commodity complex that was already looking shaky.
Goldman (and others) rode to the rescue and last week’s surprise inventory draw (which was promptly followed up by this week’s mammoth inventory build) contributed to a narrative that says the massive net spec long in crude is probably right and that the carnage we saw earlier this month was just a blip on an otherwise rosy looking radar screen.
Well on Thursday, Barclays is out parroting that same narrative.
Oil: A temporary correction
The outlook for the next quarter is rosier on most fronts. In oil, we believe the mid-March weakness is temporary. Prices declined for three reasons, in our view. First, comments by Saudi Minister al Falih spurred doubt about key OPEC member countries’ commitment to the deal. Second, DOE weekly data failed to meet market expectations, showing a larger-than-forecast build. Third, data from IEA showed that inventories built in January, erasing some of the progress of inventory drawdown. Excessive net length in energy likely amplified the sell-off in oil during the past two weeks.
We think this weakness will not last in to the second quarter for several reasons. First, the global market balance has shifted from a period of supply surplus to a period of supply deficit. We saw builds of more than 1.5-2 mb/d in 2015-16 that are now shifting to moderate draws of roughly -0.4 mb/d in 2017 and 2018. Petroleum inventories in OECD countries built in January (latest data available), but our forecasts indicate that they should continue to draw from a peak of more than 3bn barrels reached in July 2016. Second, for data through 2016, OECD refinery crude throughput averaged almost 37 mb/d, around 70% of which came from imports. Of those imports, half came from OPEC countries that are now cutting their output. Yet the latest data available to the market are still only through December 2016. In Q2, we expect releases of data that are supportive of a more bullish sentiment. Finally, because inventories are getting closer to the five-year average, the nowfrequent geopolitically related disruptions will have more of a market impact than when these outages occurred and stocks were forecast to continue building.
We see a rebound to the high $50/bbl and $60/bbl range in Q2 as inventories draw and the market readies for the peak driving and demand season.
Whatever you say. And there are a whole lot of folks who hope that assessment is correct, because even after the… how should we put this… “adverse” price action, the net position is still really – really – long:
(Deutsche Bank, CFTC)
At the end of the day, this effort to explain away a rather serious blow to the bull thesis kind of comes across as “Black Knight-ish“…
“It’s a flesh wound.”