Oil’s Bullish Bottlenecks
The “overshoot” we expected for oil is here. We are raising our expected trading range for to $65-$75, and expect further overshoot – and volatility. This is driving inflation expectations, which are driving Treasury yields – and will continue to do so. Oil is caught up in over-heated bull narratives, built in part on the fallacy that the rebalancing of inventories is complete, but that OPEC will nevertheless keep its production cuts in place in order to artificially raise prices. The cuts will stay through year-end, but it will take about that long for the rebalancing to truly complete. The strongest bull case is that surging US production is being bottlenecked by pipeline and port capacity constraints. A geopolitical risk premium has been built into prices finally, but the risks now are greater than ever.