We’ve been watching the reemergence of the dollar/oil relationship here on FT Alphaville for the last few weeks. In that time frame oil has appeared consistently to ignore fundamentals in favour of an inverse relationship with the dollar.
Then something funny happened on Wednesday. EIA stock data showed a much bigger than expected draw, oil shot up — as would be expected — and the dollar tanked in sympathy, just as would be expected under the newly correlated relationship. What’s more, gold shot up decisively too.
Hence, could it be that oil fundamentals are now beginning to drive the dollar? Well, Goldman Sachs don”t think that’s quite the case, although they do acknowledge some sort of dollar/oil relationship has re-emerged. As the analyst team headed by Jeffrey Currie wrote in their latest note (our emphasis):
To blame this week’s rise in oil prices on the macro would miss the fact that the oil price took on a life of its own. The oil market was shocked by disruptions in Nigeria, refinery problems in the US and a strong gasoline market. This not only manifested itself in stronger gasoline margins but it also tightened near-term timespreads. While we believe all of these factors are likely transient and maintain our patience with our short bias owing to still weak broader oil market fundamentals. It is important to recognize that this was not a macro driven spike in oil prices, which creates upside risks to our views.
Accordingly, with overall oil fundamentals still weak, Goldman believes it’s best to take profits now and prepare for an imminent sell-off in crude.
Take profits on long gas-to-heat trade rec before Memorial Day
A sell-off in crude oil will likely be linked to a sell-off in gasoline margins, as retailers will be done stocking up post Memorial Day. So any sell-off will likely occur over the next month or not at all. Although we believe that the need to continue to manage distillate supplies will likely keep gasoline fundamentals tight during the summer months, we are now closing our long gasoline/short heating oil trade at a profit of 13.1 cpg. While this position has functioned as a hedge against our near-term short view, we believe that recent gasoline price strength will likely prove short-lived as there is substantial excess refinery capacity with more than adequate crude oil that could be ramped up to ease tight supplies.
The key bearish fundamental, meanwhile, remains the massive distillate overhang. As they write:
Nonetheless, the data on the distillate side continue to show a market in a massive surplus, with no demand improvement and the potential for more supply on the way as global refineries return from maintenance and chase the recent surge in gasoline margins. It was this bid for crude oil from Asian refineries caught short crude that likely helped to generate the prompt tightening in timespreads over the past several weeks (but that is not the whole story — see below). Nonetheless, in recent days the tightening in timespreads has eroded some of the gasoline margin strength, which paves the way for a retracement in crude oil prices given the weakness on the distillate side.
Related links:
A dollar dive, and finally a gold-bug reaction – FT Alphaville
So who says there’s no oil/dollar correlation? - FT Alphaville
Oil, the great inflation hedge – FT Alphaville