As I noted in Macro Morning update earlier today , the WTI oil contract fell through its daily support and trendline from the mid-February low, possibly ending an epic 50% rally as Fed Chair Janet Yellen conceded that the global economy is not “great”.
Macquarie have a research note out this morning giving credence to a correction down to $30USD per barrel, a relatively small fall from the current $36 level (so, 20%) but still remain very bullish in the long term for some strange reason…
Anyway, here’s the takeaway:
Although we are constructive over the medium and long-term, the current oil price recovery has occurred against a backdrop of weak fundamentals.
From here, underappreciated bearish fundamentals plus stagnating (bullish) externalities should reverse this rally. The rally was likely initiated by a combination of institutional and retail capital inflow. The positive price action has been accelerated by several waves of short covering since mid-February.
Despite significant ST fundamental hurdles, there is a possibility that net speculator length keeps increasing as some portion of remaining shorts cover. However, the numbers are not compelling for the bull case;
Indeed! That looks extremely overcrowded for mind and right on the 50% level too. Macquaries supply/demand matrix puts forward the view that non-OPEC supply is falling after a “very slow” response to the low prices, with US production declining while Saudi and other Arab states have frozen their rates. Demand growth has been “acceptable” but it seems Macquarie are again too bullish on upside growth as other sources of energy takeover the oil behemoth.
Advertisement
Here’s their 2018 call for WTI to be back at circa $70USD per barrel in context:
