Massive Breakdown: Oil Refusing to Join Any Risk-On Party
Massive breakdown
One might expect oil to join the party if recession risks are waning. But instead we get a massive breakdown below the multi year triangle, and the short term bounce. $65/66 is huge resistance. 200 day sloping negatively, but way higher. Trading around four-year lows.
Source: Refinitiv
Record high production
Problem 1: US crude production is at record highs.
Source: Yardeni
Borat bear
Problem 2: Reuters reports that Kazakhstan, which has overproduced its OPEC quota, will prioritize national interests over those of OPEC+. Kazakhstan has repeatedly exceeded its oil output quotas over the past year. Kazakhstan pumps about 2% of global output.
Here come the consequences
Matador (MTDR) the first to cut activity & potentially buyback stock in low oil price backdrop.
"Most notably, MTDR is the first E&P to announce activity reductions for ’25 in response to low oil prices. MTDR plans to drop from 9 to 8 rigs by mid-year while adjusting its completion schedule/ also calls out non-op reductions – resulting in 6.7 fewer turn-in-lines. As a result, MTDR reduces ’25 capex guidance by -7% and oil production by -3%" (Morgan Stanley)
Speculators
Money managers' confidence on future Brent price has fallen since the beginning of April.
Source: Barclays
Stressed
Oil volatility has come down from recent panic highs, but remains very stressed.
Source: Refinitiv
Could trade down more
If we just focus on recent recessions where oil prices themselves were not a contributing factor, then we can see that the percentage decline has been well beneath that seen in other episodes. After all, Brent crude is currently down -10% from its level on Liberation Day. That’s a serious decline, but it’s nothing like the two-thirds decline for Brent crude we saw in both Covid-19 and the GFC, or even 2001 (when oil prices moved sharply lower following the 9/11 terrorist attacks). Clearly oil is something where a lot of confounding variables are at play, but the fact we’ve only seen relatively modest declines suggests that investors aren’t anticipating a huge slowdown for global growth just yet.
Source: Deutsche Bank
Let's look at some connections & correlations
The equity connection
Doing the similar thing...
Source: Refinitiv
The dollar connection
Contrary to popular belief, oil doesn't like a falling dollar.
Source: Refinitiv
The CESI connection
Oil and US Citi economic surprise index moving in relatively close tandem.
Source: Refinitiv
The rates connection
Oil and the US 10 year trading with a very wide gap post the latest price action in rates land.
Source: Refinitiv
The breakevens connection
Oil vs US 10 year breakevens with a wide gap.
