Oil commentary - 2 June 2020
Morning all. Brent is trading this morning at $38.77 up 0.45 and WTi is up 0.30 trading at $35.74. Albert Einstein once said "The important thing is not to stop questioning. Curiosity has its own reason for existing". Well Al my man, listen, I look at this oil market like how my one year old looks at this little Winnie the Pooh she has - is it real? what do I do with it? before she chews it and throws it on the floor, freshly disinfected floor of course. I'm looking at the futures market for a bearing on what is going on fundamentally, always a dangerous thing to do in my opinion. It's not flat price that I'm concentrating on though, it is structure. Only a month ago we were in serious contango markets on more or less every conceivable oil product, this always happens when demand is looking bad and boy did demand look bad this time a month ago. Steep contango allows people to store product either on land or at sea and we saw products levels stored around the globe increase to unprecedented levels. Some are saying that since the Covid-19 pandemic that more than a billion barrels of oil have seen their way into storage and that this will take until at least the middle of next year to reverse. This obviously means that production levels have got to stay where they are right now, and demand has got to tick up pretty quickly to even that mid 2021 target. Yet, for some reason, front Brent structure is close to flat and gasoil has actually turned backward. I could probably go for about three days with my opinions on that so I won't burden you but what it does make absolutely clear is that OPEC+ have some serious work to do when they meet either later this or next. I wonder though, with prices at levels that the Russians may deem sufficient to start opening the taps again what bearing will this have on the outcome of the meeting? According to the initial production cut OPEC+ made, part of the agreement was that July and Aug would see a gradual return to pre-Covid levels albeit stagnated over a few months. You'd have to argue that with global stock levels where they are OPEC+ are left with no choice but to make current production cuts policy, not as a temporary measure. Good luck with that. Good day.