Has Oil Gotten Ahead of Itself? - Knowledge Leaders Capital

Has Oil Gotten Ahead of Itself?

February 14, 2022

By Steven Vannelli, CFA in Markets

Of course, the backdrop right now is Russia—a large petroleum-producing country—threatening to invade Ukraine. This is clearly roiling the oil markets and leading to ever higher prices. Have those prices gotten ahead of the fundamentals and technicals?

US West Texas Intermediate oil prices tend to track inventory levels pretty well. The chart would suggest traders are betting on a rather significant drop in US crude inventories. In 2021 crude stockpiles fell by about 100 million barrels and prices lifted from about $50/barrel to $95 currently. This would seem to discount 50 million barrels of inventory disappearing almost immediately.

If we bring refined products into the mix, the story is the same. Refined product inventories fell about 160 million barrels in 2021 and the current trajectory of prices suggests another 70 million barrels will disappear quickly.

Interestingly, the bond market doesn’t seem to be reflecting the latest breakout. The inflation risk premium component of the ACM term premium hasn’t followed oil prices up. The inflation risk premium is more consistent with $70-75/barrel oil.

And, technically we are getting somewhat extended from a sentiment standpoint. The latest reading for the Consensus Inc. bullish sentiment on oil is an elevated 77, up almost 4x from the March 2000 low.

Who knows how the Russian situation resolves itself, but in anything but a more adverse outcome, oil prices seem to be a bit ahead of the fundamentals.

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