The forward-looking oil futures curve is positive along with U.S. supply trends, but a recent violation of price support and demand out of China raises questions of concern for oil bulls.
After oil witnessed strong gains recently, notably taking hold February 11, the market has more recently moved into a slight reversal phase. Looking at supply & demand fundamentals, as well as technical issues such as the shape of the Brent oil futures curve, Credit Suisse’s oil analyst doesn’t think the market will collapse, but then again he isn’t particularly constructive, either.
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Oil is mixed picture
In commodity circles all eyes have been on the price of oil as a leading driver of economic activity. Various bank analysts, such as Barclays and have, at various times, predicted an end to the “supercycle” bear market in commodities, as has Deutsche Bank. Other bank reports, such as those from Goldman Sachs have predicted the recent commodity rally is a head fake. Even Barclays has apparently waffled on their previous analysis.
Enter Credit Suisse research analysts Jan Stuart, Johannes Van Der Tuin and Jonathan Aronson who survey the current market rally with weary if slightly bullish eyes. “There is as yet too little real fundamentals support to expect markets to simply only rally,” they wrote in an April 6 report. “And there are still too many real question marks to be all-out confident that the supportive fundamentals trends will play out in time for summer” and peak oil usage during the summer driving season.
The chicken and the egg: which influences markets first, oil demand or supply?
Amid an overall challenging market environment, the Credit Suisse report is sanguine. While backward looking fundamental data has been “ugly,” and have “dented” existing positive trends, they have not derailed the trend.
The report points to “surprisingly soft looking China implied demand data for February,” which was “torqued down by a historically large diesel inventory build reported last week.” That looks on the surface negative. But moving beyond the headline numbers, Credit Suisse “learned since that the delay in publishing refining production data, which inform about the deliveries of major products, may stretch out into late this month or even May.” Watching these numbers play out will be a focal point for Credit Suisse. “We reserve judgment about the nature/severity of the slow-down in China’s oil consumption until then,” they wrote.
While China speaks to demand and does so with a wavering outlook, in the U.S. supply appears the issue. Credit Suisse analysts are watching “a broader non-Opec trend of broader non-Opec trend of gently falling oil supply,” they wrote. “Even though month-over-month increases were reported from Texas, which at the head-line level was ‘bearish’, production there appears to have rebounded from weather related issues in December and was well down from November averages.”
A mixed fundamental picture with the U.S. tackling the supply problem that Opec can’t get its arms around while demand in China may not be as tepid as one thinks.
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Technical picture, particularly oil futures curve / term structure, paints a positive picture
The mixed fundamental picture comes near an equally mixed technical picture, particularly on a short term basis. The oil futures curve is sending positive messages, while a recent break of support is raising questions.
After bottoming near $28 per barrel in January, then again making an important bottom near $30 which was punctuated by a February 11 rally point – the same point stocks took off – oil moved just above $40 and has recently tested, and in Credit Suisse’s opinion, broken support.
“While volatility may have reduced in other markets in the second half of March, fierce cross-winds persist for oil,” the report stated, looking at the futures contract term structure.
“Our far-and-away most favored barometer of the state of near-term global crude oil market, the shape of the Brent futures curve in the front has unambiguously improved and keeps on continually improving as flat-price corrected now appears to be bouncing. Not only is the Brent futures contract curve positive, but even the WTI curve has flattened materially, the report pointed out, a bullish formation amid bearish signals. “We worry, but remain constructive,” they said.
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