It appears speculators are playing the possibility that the global economy will "catch up" to overproduction and never-ending inventory builds. What will follow?
[1] Inventories increase until there's literally no more room, then prices fall off a cliff.
[2] The global economy does catch up, and the speculation is profitable.
Unless the've had their head in a hole, everyone in the world is aware of the future supply crunch dictated by crisis-induced capex reductions.
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Three drivers for current prices:
[1] Producer hedging - that drives up futures, especially front-end
[2] Global restocking at favorable prices - US SPR, China's expanded SPR, Euro inventory expansion, increased floating storage. The thinking is to accumulate as much cheap crude as possible.
[3] Speculative money in futures: could include many non-traditional sources including sovereign funds and national players working through intermediaries.
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Everybody is preparing (as much as they can) for price shocks.
So we have three competing drivers and an artificial intermediate profit point that ignores true supply and demand. The Supply Slinky is bunching up in the middle, but it's a matter of time. It's a race between predicted rebound and actual. If the rebound doesn't fulfill speculative expectations, then output will have nowhere to go, and prices will fall. But excess inventory and depressed prices will have a stimulus effect. They won't last.
If the global rebound matches speculative expectations, then there's plenty of excess production capacity and inventory. Price neutral, encouraging players with a 5 or 10 year horizon to stay in the game.
Balance of probabilities says take a fractional position, portfolio-wise. Keep some dry powder.
One opinion.
Jim |
