Explaining Why the Oil Price Is Rising Along With Inventories
There is no shortage of oil and the market knows it, but hedge funds need to wake up before it's too late.
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Brent oil has rallied all the way from $75 per barrel of crude oil (BBL) back to the top end of the range to $87 per BBL.
This has been the case for the past year or so. Bulls are frustrated, as oil has just not been able to make new highs above $90 per bbl since 2023, despite OPEC+ having kept 6 MPBD (thousand barrels per day) of oil out of the market, making it seem like the no-brainer long trade.
Bears have been right, leaning over oil crushing macro and generalist traders' false dawn hopes as they follow real physical market flows and demand/supply dynamics, without caring much for macro dynamics.
The first half of 2024 was characterized by massive outperformance in technology while being underweight oil and commodities in general. As we head into the second half, everyone has just pencilled in Fed cuts blindly without questioning why it would need to cut or whether doing so would be too late.
The "R" word (recession) is rarely heard these days. If one recalls back to 2023, everyone assumed a hard recession would occur after the Fed went on a rampant campaign to raise rates by 525 basis points (BPS) to curtail inflation. It did not happen.
Well, we got a few hiccups, like U.S. regional banks blowing up and Credit Suisse going under, but no actual recession. Fast forward to today and everyone assumes the business cycle as normal and a broadening of recovery, taking all assets outside of technology back to highs.
OPEC and IEA have all assumed 2.2 MPBD of demand growth for oil, with most of it coming from China. According to a recent article by Clyde Russell at Reuters, "OPEC's June monthly oil market report forecast that China's oil demand would grow by 720,000 BPD (barrels per day) in 2024 over 2023, while the IEA is expecting an expansion of 500,000 BPD, but China's imports were about 11.08 million BPD in the first half, this is down 300,000 BPD from the customs number of 11.38 million BPD for the first six months of 2023."
So, it is safe to say that a lot of blind faith is pinned on China just magically being able to solve all its woes and start growing by 1 MBPD or more. Either that is way off the mark, or these institutions and analysts need to lower their forecasts, but both cannot work! Today, inventories are rising yet prices are too. So much faith is pushed to the back end of this year, assuming all central banks cut, everything is hunky dory, and the global demand recovery goes in full steam.
Everyone is so quick to move the needle on the demand side, without truly plotting it in line with actual flows. Extrapolating the past does not make the present forecast accurate, when demand moves in cycles. Supply is easy to forecast as we know what is being produced and pumped. The same can be seen in copper, where the market desperately chases long copper, forgetting that 30% of its demand comes from China that is imploding, instead focusing solely on AI data center and the decarbonization theme, which is a much longer-term issue.
Commodities have many mini cycles over and above the longer-term theme. It is all about physical settlement. Today, there is no shortage of oil. OPEC knows it, the market knows it, but hedge funds chasing "value" cheap names need to wake up as timing is everything — cheap can always get cheaper.
At the time of publication, Bengali had no positions in any securities mentioned.
