Oil Strategy: The Rise of the Wounded Bulls?

Published May 8, 2019 | 2 min read

RBC’s Managing Director and Global Energy Strategist Michael Tran sees the oil price risk on the upside amid geopolitical risk, pushing the Brent and WTI towards $75/bbl and $67/bbl this year, respectively. Despite the most recent soft patch, he sees a firmer fundamentally driven backdrop spearheading prices higher through the balance of the year.

Investor Positioning

After the herd mentality of the last quarter of 2018 triggered a stampede out of the oil market, prices have rallied by more than 30% year-to-date without investors crowding the trade. As a result, we believe there is room for upside given geopolitical hotspots, which include the demise of Venezuela, US sanctions on Iran and while macro concerns will loom, global oil demand growth has been steadfast over recent months. While closet bears are often lurking, we have not encountered many table-pounding bears this year.

Saudi Arabia: Winning Where It Matters

Saudi Arabia is sacrificing its light, sweet crudes while its heavy, sour crudes are winning a dominant amount of share in places like China. This highlights the kingdom’s commitment to the global rebalance while also illustrate how it is strategically thinking about market share. Since the start of US sanctions on Iran, China has been importing at unprecedented levels raising question of sustainability and whether the torrid pace of stockpiling may be borrowing from future demand. Given the vulnerabilities around medium and heavy, sour producing nations like Iran and Venezuela, we anticipates the heavy, sour price outperformance to continue until either refiners cut runs or IMO 2020 pushes global refiners to lighten up their crude slate.

OECD Oil Demand: Focus on US

While the US has single-handedly carried OECD demand growth over the last decade, we expect it to begin flattening out, not because of a slowing economic backdrop, but due to the fact that energy economic capacity is near. It is likely that virtually all of the global oil demand growth over the coming years to reside in the emerging world, with China and India now representing nearly 55% of global demand growth.

Follow the Barrel

The fluid nature of the oil market deems static supply and demand balances overly simplistic. Instead we prefer tracking physical trade flows to ascertain whether markets are getting tighter or looser. Between the clearing of marginal barrels, Russian oil contamination and strong Chinese imports, we most indictors point to firmer prices through the balance of the year.

Michael Tran

Michael Tran
Managing Director, Energy Strategist, Global Research

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