Imagine walking on thin ice with only a dwindling safety cushion to break a potential fall. That’s the unsettling scenario currently being faced by the global oil market, as mounting interest rates urge traders to offload their inventories, warns renowned analyst Amrita Sen.
This trend of depleting stocks may initially help maintain lower oil prices but don’t get too comfy. Sen predicts that commercial supplies are on the brink of hitting their lowest point in more than a decade, leaving the market exceptionally exposed to any unforeseen curveballs.
At the heart of this precarious trend is the tightening of monetary policy. As interest rates climb, traders find themselves shelling out more to finance oil-storage consignments. The hard truth for oil refineries and trading companies is that the cost of hoarding oil in tanks has surged. As Sen aptly puts it, “The penalty for being caught with the unsold product (should a recession eventually cause demand to slow) is higher than before.”
Looking to the past provides a sobering reality check. A 1 percentage point uptick in interest rates among developed economies historically triggered a decrease in crude stocks by an average of 10 million barrels year-on-year. The year 2000 offers a pertinent case study: with the US raising rates amidst dwindling OPEC oil output, oil supply in developed regions slipped by 6%.
The present scenario is eerily reminiscent of this dynamic, with an even more assertive Federal Reserve and OECD crude supplies lingering below the 2010-2019 average.
In addition to high-interest rates, today’s backwardation in the oil market is also playing a significant role. This situation, characterized by higher short-term than long-term oil prices, further discourage traders from retaining oil in storage.
Despite the recent price hikes, some Asian refiners are voicing concerns that the destocking may have overreached, prompting them to consider replenishing their inventories with Saudi crude. Across the Pacific, US inventories are also running on fumes after the federal government dipped into the Strategic Petroleum Reserve last year to subdue prices.
Sen’s warning to investors, entrepreneurs, and market watchers is clear: “All this will leave the market vulnerable to shocks and unexpected Opec+ policy moves by the end of the year. Buckle up!”
This looming oil market volatility underscores the importance of diligent risk management and strategic agility for both investors and entrepreneurs. In such uncertain times, keeping an eye on the horizon and a hand on the steering wheel has never been more crucial.