Following OPEC’s surprise production cut in April that saw crude oil squeeze from $65 to $80 per barrel in a manner of days, hedge funds and the like have once again resumed selling on slowing growth and recession fears. As we can see below, few commodities outside of precious metals and a few ags have been able to escape the growth slowdown and have corrected accordingly. Energy has been front and center of this dynamic. However, while the OPEC put may have only provided a temporary relief in oil prices thus far, a number of fundamental indicators of the oil market are suggesting the tide may be beginning to turn.
It’s been a rough year or so for energy, but let’s not forget the significant headwinds prevailing for oil prices in recent times. The past 12 months have seen the Chinese economy on hold for over 200 days, a warmer than usual North America and Europe, the Biden administration draining roughly 300 million barrels from the Strategic Petroleum Reserve, Russia releasing much of their own energy supplies onto the market prior to their sanctions coming into effect, as well as a slowing global economy. And yet, amid all these woes, inventory levels only moved into bearish territory for a small amount of time.
Given a number of these headwinds are no longer present, the rapid shift back toward inventory drawdowns is perhaps illustrative of the structural demand and supply imbalance present within the market. What’s more, the actual impact of any OPEC production cuts won’t be felt for some months still given they’re not slated to take effect until May.