Oil market sentiment is nearing lows not seen since Covid 19 – a time when government lockdowns collapsed oil demand and fears of full storage sent oil prices briefly negative. Since peaking in June 2022 following Russia’s invasion of Ukraine oil prices are down 40% amid recession fears, despite rising global demand, rapidly depleting oil inventories and a tight physical market:
In times of extended weak price action, investor sentiment tends to shift regardless of underlying fundamentals, with price driving the narrative. However, these disconnects between fundamentals and sentiment can present opportunities for market outperformance, as noted by renowned investors like Warren Buffett and Howard Mark. This is particularly true when fundamentals are improving while valuations remain low due to widespread negative sentiment.
During periods of pervasive negativity and fear, it is beneficial to reevaluate fundamentals and consider alternative data. This approach can be applied to analyzing the oil market and assessing recession fears. While predicting the future is not possible, a comprehensive analysis of the oil market and related equities should include a consideration of these factors and an evaluation of their fundamental values.
Negative Sentiment is Consensus
Negative oil sentiment has gotten so extreme that the forward oil price implied by futures markets is currently 30% lower than consensus estimates. According to Goldman Sachs, the investment bank which we credit with the chart below, this consensus/futures gap falls into the 98th percentile throughout history:
Goldman Sachs’ statistical analysis suggests that the spot price of oil typically reaches or exceeds the consensus forward price, aligning with the risk premium observed in futures markets. Although this analysis is not the sole basis for evaluation, it is valuable to examine historical instances where the futures curve has deviated significantly below consensus expectations. In such cases, oil prices have historically experienced significant increases. While history does not precisely repeat itself, it often exhibits similar patterns.
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Source: Seeking Alpha