Oil and risk markets have been enjoying a lovely bounce over the last two weeks after a December which was, let’s say, suboptimal. Brent has jumped from $50 to $59 while WTI moved from $43 to $50. Equity and bond markets have also screamed higher following a month in which S&Ps came within a whisker of ‘bear market’ territory in a 19.8% selloff.
Is the bounce in oil and other risk assets for real? Or is this merely a trap on the road to further downside pain?
In our judgment the idea that the oil market has at least found some temporary footing is very much real and we see limited downside risk in the coming weeks. There are obviously risk factors to a bullish or even neutral market outlook for oil given global economic concerns, but it feels like risks are skewed to the upside at the moment. Why? Because central bank and geopolitical risk have temporarily shifted from viciously bearish for most of the last six months to a much more sanguine near-term outlook.
On the central bank front, the U.S. Fed and PBOC have both signaled in the last two weeks that they will work to provide a soft landing for their respective economies should policymakers continue to pursue economically negative trade practices. In the U.S., Fed chief Jerome Powell’s comments that the Fed may have to reconsider shrinking its balance sheet if economic conditions tighten were an extremely potent bullish jolt for oil. This marked an incredible shift in tone from…