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The February Hangover In Oil Markets

Refinery

Have you ever celebrated an event too much? The next day isn’t always very fun. Sometimes the most enjoyable events in life such as holiday parties, weddings and birthdays are followed by terrifically awful mornings necessitating a nice long nap.

The same goes for oil and stock markets in February following a January which included an 8% jump in S&Ps and the best gain for WTI (nearly 18%) on record. So far February has included a 1% drop in WTI, flat S&Ps, earnings forecasts downgrades for 1Q and a growing chorus of negativity from financial commentators of all shapes and sizes. A quick scan of the newswires this week offers a call from fund manager Kyle Bass that the US will enter a recession in 2020, a note from Morgan Stanley’s head equity strategist that ‘earnings recession is here’ and results from a Duke University survey of US CFOs stating they overwhelmingly expect a recession in the next two years.

Wasn’t it only four short weeks ago that a newly dovish US Fed was going to place a theoretical disco ball over global risk markets and lead us to a wonderfully bullish 2019? Have the facts of the market outlook changed substantially since the calendar turned to February 1?

We don’t think so. While there are obviously nagging bearish factors at work such as anemic growth, high existing crude oil and gasoline supplies and the US/China trade battle the truth is that the two key themes driving crude oil prices in 2019- a dovish US Fed and OPEC+ production cuts- are still very much intact. This week the one and only Mohamed El-Erian commented that he thinks the Fed’s next rate move will be a cut- rather than an increase- in 2020. This forecast clearly implies a certain degree of bearishness about the health of the global economy. But as we’ve argued in recent notes- a dovish US Fed and tight global crude supplies have outweighed shaky economic confidence in the past.

As for OPEC+ we are seeing headlines hinting that Venezuelan exports continue to tumble and hints from the Saudi’s that they’ll drive another 200k bpd of reductions in February. Brent spreads have extended their recent gains and continue to forecast a reasonably strong physical market in the second half of 2019. The head of commodities at Citi offered a note to clients this week suggesting that fundamentals remain strong and prices can be expected to move higher due to what they estimate as a current…




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