After a year of relative stability, volatility has returned to the oil market with a vengeance this week, but despite the large moves in oil prices to the downside analysts at Credit Suisse believe there’s no reason for long term oil investors to panic just yet.
In a research report published on Thursday (before Friday’s 5% drop and subsequent recovery) an the analysts at the Swiss bank claim that the recent oil volatility is illustrative of a broader theme affecting markets. Specifically, markets are increasingly making quick turns with no new fundamentals data driving of the price action. Recent oil price moves appear to be “risk-off/CTA-driven” moves according to the Oil & Gas analysts who penned the report. This analysis is similar to recent comments from JPMorgan analysts and from famous oil trader, Pierre Andurand.
Incidentally, Reuters is reporting that Andurand has recently liquidated his long position in oil.
CS: Oil Prices Do Not Reflect Oil Demand
Even though the price of Brent crude has only plunged below $49/bbl in recent days, this year roughly half of the trading days have seen price moves greater than 1% the analysts note. However, there’s been little in the way of news flow to drive such movements. To put it another way, the frequency of news/data flow does not justify the volatility seen over the past five months.
What little fundamental news flow there has been, has been positive the analysts point out. Even though the market is still waiting for large inventory draws to materialize in places other than floating storage such as Saudi Arabia US weekly crude draws have been steadily improving versus the 2011- 2016 average.
In other words, based on the limited data we have for this year, oil fundamentals seem supportive of price stability. The lack of substantial inventory draws make it hard to justify higher prices, but overall fundamentals are not deteriorating, which is the opposite of what the price action indicates.
On the demand side, fundamentals are showing a similar pattern. Credit Suisse points out China Q1 2017 oil demand growth performed better than any other major oil consuming economy, driven by consumer transport fuels and petrochemicals and while some Wall Street analysts have speculated that the recent fall in iron ore prices could signify lower Chinese economic activity, “lower iron ore prices do not necessarily flag a clear, strong negative signal for China’s economy or its oil demand.” As iron ore prices have spiked over the past 12 months despite stagnant demand and rising supply, it’s no surprise the commodity is currently experiencing a correction.
Overall, Credit Suisse’s analysts believe:
“We think fundamentals are looking incrementally constructive, and still expect large stock draws in Q2 and Q3 – it is too early to throw in the towel from a supply/demand perspective.”