Don’t Forget Demand When Looking At Crude

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On June 29th, we wrote a piece titled “What Oil is Telling Us?” which can be found here. The subtitle of the piece was “Supply has been the story but demand is still the engine of crude oil price movement” and that is still the case. We are not trying to dismiss the supply drama we have seen over the past week, which was clearly a major catalyst in the volatility ebbs and flows that were apparent in this week’s price movement. The OVX, the Cboe’s crude oil volatility ETF jumped 6% on Wednesday but gave back half of that yesterday as price rallied again. (Side note; don’t mistake the OVX for moving like the VIX does, i.e. volatility up when the market goes down. The largest recent one-day spike in the OVX came on June 27th and crude finished +$1.62 that day).

Why Crude Moved

In the last 2 weeks, there have been 3 major supply disruptions or talk of supply disruptions;

1. President Trump’s stance on Iranian crude oil since walked back a bit by Secretary of State Mike Pompeo.

2. Syncrude in Canada losing 350,000 barrels per day (bpd) of production

3. Libya declared a force majeure causing a shutdown of over 800,000 bpd of crude oil. All of these were important in driving prices up but even together, prices would not have run as high as they did without the backdrop of strong demand to push them.

Demand in the form of the refinery utilization numbers released by the EIA have been impressive, peaking 2 weeks ago at 97.5 which is the 36th highest level since they started keeping records in 1990. That may not seem impressive until you consider that’s 36th out of 1,445 readings of data. The $4.18 drop we saw on Wednesday started with Libya partially coming back online and Syncrude giving optimistic guidance, but it accelerated when President Trump and the Commerce Department released a list of $200 billion more in threatened tariffs on China. That put a crimp in the view that global demand would remain strong and commodities fell, including crude. Supply disruptions happen in crude all the time and often get reversed quickly. Demand, however, is the ocean liner of the crude dynamic. Don’t make the mistake of ignoring that side of the equation. 

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