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How Tight Are Physical Oil Markets? Time Spreads Offer Hints

Macroeconomic concerns pushed oil lower this week as the recent rise in interest rates spilled bearishly into the stock market and ultimately pushed risk assets lower across the board. In the U.S., the spike in the 10yr yield to 3.25% (7-year high) instigated a drop in S&Ps of 232 points from its all-time high on October 3rd through its weekly low on October 11th representing an 8% decline. While macro pressure could persist as a bearish factor for oil in the near term, we’re thinking the more powerful influence on oil prices in the short term will be the ability (or inability) of Russia, Saudi Arabia and the U.S. to replace lost Iranian barrels as sanctions are scheduled to take hold on November 4th in an already undersupplied market.

In gauging the status of the supply/demand balance there are certainly market participants among us who think that oil’s risks are very much skewed to the upside. IEA chief Fatih Birol made his concerns clear at a conference this week pleading with OPEC and non-OPEC producing nations to do what they can to increase supplies as the oil markets “are entering the Red Zone.” Mr. Birol is concerned that more bullish momentum in oil prices will eat into global economic growth. Hedge funds have also increased bullish bets on oil in recent weeks with net length in ICE Brent contracts jumping 50% from August 21st to October 2nd.

On the other side there are more temperate forecasts available including- very notably- a call this week for…




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