Make no mistake, crude and oil product risk is bullish
June 20, 2024
Key Observations:
Casual observers of the oil market tend to look mostly at prompt prices in level terms (i.e., $80 falls to $70 only to return to $80). Therefore, it is in moments especially like the current one that we wish to stress what is happening in term structure.
Note in the chart at right that the M1-M2 timespread in the NYM WTI crude oil futures curve made a recent bottom at 13 cents per barrel (closing price basis) about three weeks ago but is now trading closer to +$1. Or, in other words, this price is now approaching the ytd high ($1.14, Feb. 20). This timespread reveals the underlying near-term physical global balance in oil is tightening.
This fact is bullish for prompt crude oil futures. This fact is bullish for upstream equities, despite their supposed attention to long-term discounted cash flows. Indeed, the shape and behavior of this net-profit driven forward curve is evidence, again, that central bankers should revisit their definitions of what “inflation” means, and how to measure it.
Practical, non-dogmatic observers will note the curve at right is advancing, as we expected it would, which is why we thought investors would want to own the M1-M2 timespread and the so-called Dec-red-Rec timespread (more formally, CLZ4-CLZ5). That spread widened by +$2/bbl.
These trades have clearly worked. They have also been among the correct ways to manage oil price risk during the shoulder season. Now, we become more friendly to outright long flat risk in CLV4.
Source: Bloomberg, Blacklight Research.
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