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Are Inverted Yield Curves A Harbinger Of Lower Oil Prices?

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The first quarter of 2019 was lovely for oil bulls as Brent increased 27% while WTI climbed 33%. With Brent now trading near the $69 mark and WTI above $60, there are a fair number of prominent analysts who see OPEC+ tightening and unplanned outages in Iran and Venezuela push oil higher by at least another $10 or perhaps even $20 per barrel. We concur that fundamentals are improving and see potential for supply/demand balances to tighten further as US waiver deadlines on Iranian crude are revisited in May while Venezuela and its oil sector descends further into chaos.

Unfortunately, there is also a black macroeconomic cloud over commodity markets in the form of deeply depressed global bond yields which have recently flipped inverted across some parts of the maturity curve. Fixed income markets are screaming that the global growth picture is unimpressive and to us this lack of confidence continues to suggest that the easy money for crude oil bulls has already been made. While there is reasonable hope for upward momentum this spring- do not expect to see similar returns on oil in Q2 to what we saw in Q1.

So where are these global interest rates trading and why should oil markets care? Government bonds have rallied substantially since the fall as expected global growth rates have decelerated and central banks have taken dovish measures to prop-up economic performance. In the US, the 10yr yield has dropped from 3.2% to 2.4% in the last six months and the yield on the…




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