Sense here from Citi:
Oil’s recent sharp price recovery is eerily like the bounce seen late last winter. Both followed a period of price stability following a sharp decline. Both appear to be spurred on by unverifiable assumptions surrounding single data points. Both are driven by sentiment and financial flows rather than clear market fundamentals.
Like the price rebound earlier this year, it follows a reading by technical analysts declaring that prices reached a bottom and a turning point was at hand. And like a self-fulfilling prophecy the chartist readings were followed by inflows from algorithmic traders to buy dips.
The similarities don’t end there – the market is again seeing inflows, especially from retail investors, potentially creating froth at the front of the curve, as well as from expected US dollar weakness ahead. But this time round that inflow is far less robust than in early 2015, when AUM of retail investors in oilbacked ETFs lifted their share of prompt length from some 15,000 to 200,000 contracts at the peak and when passive index inflows from institutional investors in 1H’15 quickly outpaced the outflows from late 2014. Now the market has seen two weeks of inflows into both ETF and passive index investments by a modest ~$0.22, bringing combined YTD inflows to over $17bn. Undoubtedly the denomination effects of a weaker US dollar following the Fed’s September decision to postpone a rate hike may be awaiting further QE actions by central banks, which would provide a de facto stronger dollar rather than one induced by a Fed rate increase.
Still other similarities include prices rising despite a continuing build in crude oil inventories, extreme expectations of a rollover of US shale production accompanying Friday’s weekly rig utilization counts, and perhaps an overly optimistic view of a quick change in seasonal demand. Last spring there was optimism that both refinery demand for crude oil following a period of maintenance and turnarounds as well as robust final demand would tighten markets with inventories drawing down. This autumn optimism about demand focuses on the end of the current maintenance season and robust winter demand ahead.
On top of all of this are enhanced geopolitical risks following Russian deployment and military action in Syria, plus North Sea maintenance strengthening Brent time spreads and perhaps improved macroeconomic sentiment based on speculation that China’s economic slowdown has reached a bottom.
The market appears to be setting itself up for another sell-off, with the looming questions being when and how far. Citi is retaining its Q4 Brent and WTI forecasts for lower prices ahead, while it is unclear whether the new lows will be registered in Q4’15 or Q1’16. The recent price increases were undoubtedly pushed by speakers at well publicized conferences in London and New York. Two big uncertainties remain when Iran returns to markets and by how much.
