"Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring,” Goldman’s Jeffrey Currie recently wrote, on the outlook for crude going forward.
The rally off the lows has largely stemmed from the market’s hopes for an output freeze from Russia, the Saudis, and everyone else who isn’t Iran. Producers will meet in Doha next month to try and hammer out an agreement, but as we’ve documented exhaustively, the whole effort is farcical at best.
Moscow and Riyadh (among others) are already pumping at record levels, and it’s not at all clear why “freezing” output at all time highs is bullish. Indeed, as we noted last week, Russian crude exports are set to rise going forward. "The discussion is only about freezing production. And not exports,” Russian Energy Minister Alexander Novak told reporters earlier this month.
Throw in the fact that a recalcitrant Iran is in no mood to freeze anything now that international sanctions have finally been lifted and you have a decidedly bearish fundamental backdrop for crude, and that, in turn, should be expected to pressure the rest of the commodities complex which has for years struggled to deal with slumping Chinese demand and a global deflationary supply glut.
For their part, Barclays thinks the bullish sentiment around commodities could shift abruptly in the not so distant future, leading the “herd” straight off a cliff.
“Investors have been attracted to commodities as one of the best performing assets so far in 2016,” analyst Kevin Norrish begins. “However, in the absence of any concerted fundamental improvements, those returns are unlikely to be repeated in Q2, making commodities vulnerable to a wave of investor liquidation that we estimate could, in a worst case scenario, knock as much as 20- 25% from current price levels.” Here’s more:
Given that recent price appreciation does not seem to be very well founded in improving fundamentals and that upward trends may prove difficult to sustain, the risk is growing that any setback will result in a rush for the exits that could again lead commodity prices to overshoot to the downside.
Key commodities markets such as oil and copper already face overhangs of excess production capacity and inventories, but also now face another obstacle in the recovery process, that of positioning which is now approaching bullish extremes.
Net flows into commodity investor products totaled over $20bn in January-February (the strongest start to a year since 2011), futures positioning in key markets such as copper and oil has switched rapidly from bearish to bullish extremes in a few short weeks and there is evidence of a surge in investment flows into Chinese commodity markets as well....MORE
Tuesday, March 29, 2016
"Commodities Longs Will "Liquidate In Unison," Driving Bulls Off A Cliff, Barclays Warns"