Intraday Market Thoughts

Why Oil is Different

by Adam Button
Apr 13, 2020 15:49

We've rarely seen so much confusion around an OPEC decision but much of it speaks to a misunderstand of how oil differs from so many other financial assets. Crude jumped 8% at the open only to give it all back.  Watch out for spotty trading Monday as US re-opens, while most of EU remains shut for Easter Monday. There are currently 4 Premium trades open, all of which but one are currently in the green.

Click To Enlarge
Why Oil is Different - Oil Apr 13 2020 (Chart 1)

OPEC is an oil cartel but it's also a political organization and one that benefits from higher oil prices. Their spin about 20 mbpd of cuts is a fantasy. For one, it bends the baseline from February to April, where Saudi Arabia and others are pumping full-out. It also counts real and anticipated market-driven declines and hollow pledges. The reality is that OPEC+ is lowering production by 4.3 mbpd from Feb levels.

Naturally, this is helpful but crude is unlike almost every other market. Before the cut, oil was around 30 mbpd oversupplied and even if there was a 20 mbpd cut, it would still mean that 10 million barrels per day would need to go into storage.

Almost every other tradeable asset can be transported and stored relatively easily but crude can't. Oil above ground is a negative-yielding asset because it needs to be stored and transported. The entire midstream industry is built around doing that efficientl,y but everything has ground to a halt now.

In other assets classes, financial flows can disconnect prices for months or years – you can store money in any currency, bond or equity and many physical commodities can be easily stored. But crude ultimately needs to be bought by refiners or put into storage. There's some demand in spare storage now because you can buy in the spot market and sell into the futures market and guarantee gains but that window is narrowing.

In the real world, no one is driving and industry is crippled. Refineries are getting deliveries they don't want and undoubtedly cutting back on future orders as wholesale gasoline/diesel buyers stop buying from them. An OPEC cut simply isn't going to cause panic buying at refineries.

Also worrisome is speculators's tourism in the oil market. Obscure people we follow on twitter for oil news are suddenly celebrities. Technical news are getting hundreds of retweets. People are trying to crunch the supply numbers and are oblivious to the demand side, which is more opaque than any time in history. In normal times you can reasonably peg down the supply/demand balance within 500K bpd. Right now the spread – even among good analysts – is 20-40 mbpd.

Those flows are creating incredible short-term moves that makes any fundamental foray into oil treacherous. Squeezes can be limitless but ultimately, so long as supply exceeds demand, there's no floor in oil.

As for the broader market, look for signals from crude Monday with much of Europe and the world still out for holiday, the start of the week could be messy.


Latest IMTs