Looking under the hood of the oil rally

Crude has seen a 55% increase from the year low in to current prices.

Source: Bloomberg

Demand has shown green shoot signs of recovery as supply, having been forced to response to the price, reduced production (in the US at least).    

So is the oil conundrum at an end?

  • 12 weeks of declines in US rig counts to a record low has finally seen it tick up modestly (only by one), and shale saw a tick up for the first time.
  • US inventories increased by 8.9 million barrels last week, which is the second highest print of the year.
  • The OPEC-Russian freeze accord is due to be ‘debated’ between 20 March and 1 April. Public releases of this signing have fallen silent, as Iran has never wavered on its plans to reach pre-sanction levels.
  • OPEC output, although notoriously hard to track, is continuing to expand month-on-month. The January data illustrated that global output was approximately 1 million barrels a day above demand.
  • Demand is fluctuating, with gasoline inventories falling by more than three times estimated two weeks ago. However, this week’s data shows a very sharp reversal, with inventory flattening rather than declining.
  • Chinese demand has been fluctuating. The demand ramp up in late February/early March can be seen as re-stocking after the Chinese Lunar New Year.
  • India’s demand, which briefly overtook China, has shown its data may have been overstated.

The market is starting to review the macroeconomics to evaluate the move in oil. There are clear reasons that US$25 a barrel was an undershoot of fair value. However the market is showing signs that at US$42 a barrel, which may be an overshoot of fair value.

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