There are numerous markets and odd proclivities to watch to benchmark the Trump presidential era. The stock market was up every month in 2017 and volatility greeted all-time lows. Short volatility retail trading predominated as the Trump era is also benchmarked by the setbacks of perhaps his biggest supporter, Jacob Wohl. The list of potential oddities goes on. But one Trump era market that isn’t much discussed is oil. This economic benchmark had a near-term bottom just prior to the Trump election and rocketed since. But this is also a market now sending new signals.
With geopolitical risk all around, oil has been trending higher but is still but a fraction of its pre-crash 2008 level
When the oil market hit $29.64 in January 2016, to some financial participants it seemed like an odd netherworld. It was only June 2008 when the oil market hit $157.73 and now, eight years later, worth but a fraction. How could market prices be so off in 2008? Normally that type of volatility is reserved for a geopolitical or economic shock. But if there was geopolitical shock it was 2016, not 2008 prior to the financial crisis, where the shock was most easily bench-marked. Back in summer of 2008 before the market crash, the Middle East was not being torn into pieces as it is now and a surprise US election did not put someone into office from outside the establishment class. The geopolitical risks seem meaningful now, as proxy wars break out across the middle east, but the price of oil remains but a fraction of its former self.
There was a grave concern as echoed by George Soros, who bet against the Trump election and lost. And there was jubilation, as expressed by Carl Icahn, who bought a massive amount of overnight stock futures immediately following the election after the market had cratered.
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None of this extreme volatility was priced into oil, which was bouncing off lows heading into the election.
Enter today’s oil market, which trended higher since January 2016 and currently trades near $65 per barrel (basis WTI). That market price rise and mean reversion from the bottom has been notable. But is the price now at a near-term “tipping point?”
Macquarie sees a mean reversion coming based on fundamentals and technicals
Looking at the oil markets, Macquarie’s Vikas Dwivedi on the global commodities research team look for performance drivers that are both economically and market driven.
On an economic level, they see crude oil demand moderating, pointing to weakening demand for physical crude grades as a fundamental indicator of “moderating strength in crude demand.”
This moderating strength comes amid a China that is gently deleveraging, a European central bank pulling back on its swelled balance sheet and US interest rates set to rise at least three times in 2018, according to numerous analysts.
But it is more than just economic fundamentals that has Macquarie eyeing a potential top.
“Bullish momentum” has created a market environment that persisted where managed money in both Brent and WTI oil contracts pushed to 1.13 million contracts, 231,000 higher than near year-over-year comparisons of 903,000 in February of 2017. While speculative money, the largest portion of the market, increased, Swap dealers ended short 55,842 while commercial concerns were equally short by 766,918, creating a market equilibrium of net long by 157,853.
In part, oil strength is driven by US dollar weakness via the "petrodollar," is also supported by technical trends which often drive computer-based systematic programs. But these programs might have gotten a touch past their skis – and the causation is about more than just technical mean reversion, which has rocketed past historic levels.
For their part, Dwivedi and his team model the length of the oil contracts exposure relative to the price to determine their mean reversion point, which could be upon us.
“Looking at record high net length levels,” is one area where Macquirie might “advise caution to bulls.”