The Risk of Further Supply Disruption Remains Elevated

Indeed, it’s tough constructing a bullish argument amidst a constant stream of news flows pointing to a worsening global outlook as tariffs present a significant threat to US growth and in turn the health of the Global economy.  And to complicate the matter even if OPEC extends their supply compliance, given the burgeoning non-OPEC supply as evidenced in the latest US inventory reports, OPEC+ will face a scabrous task balancing the current supply with the demand side of the equations.

With the colossal supply tail risk following tanker attacks near the Strait of Hormuz fading quickly, it should be back to the markets seemingly endless preoccupation with US-China trade and the outlook for global oil demand.

Waning risk appetite on the back of the omnipresent threat of trade war escalation continues to sully the landscape which has weighed on the oil price to an astonishing degree. Especially given that the impact on oil demand from higher tariffs is virtually impossible to quantify over the near term.  But with the level of unease increasing across financial markets which continues to spread like spreading like wildfire, even the most ardent oil bulls might consider heading for the sideline until the dust settles

But for me their opportunity at every turn, especially with the Middle East dust-up providing us with a stark reminder of how quickly things can escalate in this in this politically fractured part of the world.

Here is what this lonely Oil bull is looking at

While monthly reports from the EIA and OPEC this week both revised down estimates for 2019 global oil demand on global growth concerns, they also forecasted and undersupplied conditions his year, with OPEC expected to continue producing at a level below what would be needed to balance the market.

The OPEC meeting looms large as it’s expected to resolve the critical issue of whether OPEC+ will extend the production cut agreement into 2H19. The conference is planned for June 25-26, but Saudi Arabia and Russia are reportedly seeking a delay into early July to allow June supply/demand data to be considered before a final decision is made. It also makes sense as the panel will be able to judge better the fallout from the crucial G-20 summit and whether President Trump will follow through with more tariffs.

I was rewarded handsomely last week after reversing my short below WTI $51(as per Thursday market note) by the unexpected escalation in Middle East tension. But the reason I remain a buyer on overextended dips is I continue to believe that demand risks are more than sufficiently priced into oil now, especially the prompt contracts while supply risks are not. With the US administration pointing the finger at Iran for recent tanker attacks and going against the grain and the prevailing market flow I believe the risk of further supply disruption remains elevated and should provide a credible backstop for Brent and WTI.

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC