Insights

Oil

Light crude sold off today by 1.73% to $72.11.

Our Trending Value Equity, and our Trending Value ETF Models all have significant exposure to this sector.

Here are a few thoughts from our research partner https://www.hedgefundtelemetry.com on why oil is down today, and why it seems likely to reverse.

 

  1. OPEC disagreements this month with UAE-Saudi standoff is reminiscent of Russia-Saudi standoff in March 2020, where the rift caused a complete collapse in the alliance. I believe this is causing some concern among investors
  2. We are seeing a spike in USD coupled with falling yields. This is forcing an unwind of some inflation hedges.
  3. Shale producers have been locking in hedges for next year on that spike on Monday.

 

One difference worth noting: unlike March 2020, the oil market is currently in a daily deficit, & not oversupplied by ~28mm b/d. Let’s call *actual* OPEC spare capacity 4.5mm b/d. Given the lag to ramp & ship, we don’t think OPEC could tank the market if it wanted to. And they don’t.

The current alliance is much stronger and cohesive than it was back in March 2020. In fact, Russia and Kuwait are working behind the scenes to repair this fissure. Something very different than we have seen before.

After the notes above were shared, the American Petroleum Institute report came out and shared some rather poor inventory numbers, further supporting the supply/demand characteristics for oil.

 

Please call or email with any questions.

 

Peter Schenk, CMT, CIM | Portfolio Manager

 

 

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