In addition, in the circle in red, we can see where last week OPEC+ announced that production would be cut by about 2mm barrels a day, which is about 2%. As of right now, the overall supply and demand imbalance sits at -1.85% and the U.S. This approximately 145 mm barrels over the 180-day period is equivalent to about 0.8% of demand, which runs about 100mm barrels per day. The white line below shows that reserves have come down by 27% from 560mm barrels to 416mm barrels over the ensuing six months. This will curb the higher energy prices that Americans were facing. government announced back in March that it would be releasing supply from the Strategic Petroleum Reserve over the summer and into the fall. ![]() For all of 2021 and into early 2022, there was an excess of demand relative to supply and this led to rising prices throughout last year and into early this year, which were then only exacerbated by the geopolitical events in Europe.Īdding to the difficulty of assessing supply and demand, the U.S. Once more, prices were under pressure until supply and demand got back within the 2% threshold. Again, we see a supply and demand imbalance around Covid-19 with plummeting demand coupled with over supply. This had a negative impact on prices that lasted the entire period I have encircled while the excess supply lasted. fraction revolution in the 2014 to 2016 period, when there was less discipline on supply as independent companies were quickly bringing product to market, we tipped into an excess of supply of more than 2%. We can see on this 10-year chart that because of the U.S. The oil market is always closely in balance, and therefore, a difference of 2% of excess demand or supply can really begin to tilt prices. I have drawn two horizontal lines showing whenever the supply and demand gets out of balance by 2% or more based on EIA data. From this data, I can look at supply and demand and plot the difference in white below. My own thoughts on the fundamentals of the underlying market itself begins with an assessment of the supply and demand for crude oil products. I am struck that the managed futures community is still net-long, even if less so, in a market that has been trading poorly for the last six months. The chart shows that the length in the futures among the managed money community has been coming down steadily since the highs in the first quarter, but traders remain net-long though the positioning is dominated by spread activity. The first chart that catches my attention is the COT for crude oil. Positioning can help us understand the latter because it may help us determine the reaction to news more so than determining what the news itself might be. In any trade there are two sets of fundamentals – the fundamentals of the underlying market and the fundamentals of the contract itself. ![]() To help me understand the lay of the investment landscape, I look to the Commitment of Traders (COT) Report to understand how various players are positioned in the market. With implied volatilities elevated, we need to be sharper than normal on our directional analysis because we will either pay more insurance premium if we choose to buy options or we will be looking to sell options, and short gamma can be difficult to trade in uncertain markets.
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