Clearly, we are not in the 1990’s were the smallest disturbance in the middle-east would cause chaos in energy markets. Tension is rising in the Gulf region as attacks on two tankers near the Strait of Hormuz have put the US and Iran on a collision course. Despite traders being caught short, as they anticipate further weakening of global demand, the upwards bounce was limited. On Friday, the IEA reduced global oil demand growth in 2019 for a second consecutive month highlighting demand issues that have been bulldozing oil prices downwards. Yet the long-term outlook for oil looks stronger especially at $51 brl. The trade is reported to be short the front-end while building longs on the back end of the curve (locking in a cheap price for future delivery) in expectation of steepening. The middle of the forward curve remains ultra weak and complicated (markets understand that the forward curves is not a reliable forecast of futures prices). With the middle-east gulf region on a hair trigger, US summer coming in hot and slower global demand already pricing in, the upside in oil looks attractive. Especially considering how short the market has become in the front-end. Our trajectory for higher oil prices through year-end remains intact, lack of reaction to supply complexity and softer demand is hurting the market further than initially anticipated.
By Peter Rosenstreich