Energy prices fell again in January, but low stocks in OECD countries and some disruptions that prevented new supply from coming online give room for prices to rebound. Heating oil in the US in particular could jump if the run of bad weather continues.

“Total OECD stocks are at multi-year lows with the latest data showing a historic stock drawdown of 1.5Mbd in Q4-13. Early January numbers suggest stocks are flat on the month instead of the normal seasonal build,” says the most recent Duet Commodities Fund investor letter. “We are bullish and believe that 2014 will provide, as we said last month, very interesting opportunities in the commodities space.”

Falling energy prices an overreaction: Duet

Duet Commodities thinks the recent dip in prices is an overreaction largely by analysts who influence investor sentiment, to the current ample supply of energy and the general EM fears that also hit equity markets, according to a shareholder letter reviewed by ValueWalk. The famous commodity hedge fund was up 0.29% in January according to the letter.

“We think those factors are over exaggerated by some market participants,” says Duet Commodities, which acknowledges that there is tail risk if China or other EM demand drops off, but that isn’t their base case. “On a pure fundamental perspective, the Oil market is becoming very tight.”

OECD oil industry stocks are at a six-year low

OECD oil industry stocks are at a six-year low, well outside the normal seasonal range, and distillate stocks on the US East Coast are at historic lows. Duet thinks that continued bad weather could drive Brent from its current 105 – 110 range to 110 – 115 in the next few weeks.

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Market disruptions also mean that the actual supply is lower than projected. Duet Commodities mention Libya as one example of the market disruptions they think will support prices, where 500/600kbd were supposed to come to market this half, but are being delayed by renewed political tension and violence.

“In March, refineries will enter the turn-around season and between 2.5/3.0 Mbbl of crude oil will be taken off-line. As this has been largely anticipated, we would rather focus on how the refined product stocks will be replaced,” says the letter. “The markets will need to start pricing in the overall low level of stock and the low level of OPEC spare capacity.”

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