Crude oil: Prices move higher and further away from fundamental value

Analysts from Rabobank explain how the crude oil market has been affected by the introduction of more retail traders. The see scope for the WTI-Brent spread to weaken in the weeks ahead as retail buying pressure wains and supply and inventory weigh on oil market sentiment.

Key Quotes:

“Oil markets have been on a euphoric high in recent weeks as retail FOMO (fear of missing out) propels prices higher and further away from fundamental value, as we see it.”

“It is worth noting that the surge of capital into oil ETPs has not been evenly distributed between the two most actively traded global oil contracts and an outsized portion of these passive flows have been benchmarked to WTI rather than Brent. This is not necessarily a new trend but the situation has been exacerbated by the sudden surge of retail participation in oil markets which tends to favor the US CME exchange and US benchmark WTI crude oil over the European ICE Brent contract.”

“This divergence in flows has also likely played a role in the tightening of the spread between the two crude oils which has historically widened on rallies. Given the retail nature of the WTI buying and the extreme positioning in relative terms, we see scope for the WTI-Brent spread to weaken in the weeks ahead as retail buying pressure wains and supply and inventory weigh on oil market sentiment.”

“While we continue to be extremely impressed by the scale and scope of retail oil buying, looking forward, we do see this FOMO bid waning in the coming weeks as regulatory pressures and market forces dampen the excitement around oil prices.”

“While the euphoria is strong now, carrying a “long” spot Brent position at $40/bbl plus might begin to feel very expensive and especially if inventories continue to make new highs. Otherwise, retail investors may be left holding the bag.”

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