The oil market is in for a big shock as high interest rates are causing traders to run down inventories. Getty Images / Suriyapong Thongsawang
Oil stocks are falling as high interest rates make storage more expensive, says analyst Amrita Sen, co-founder of data provider Energy Aspects.
That could expose the oil market to a major shock, she warned in the Financial Times.
“All of this will leave the market vulnerable to shocks and unexpected policy actions from OPEC by the end of the year. Buckle up,” Sen continued!
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The oil market is vulnerable to a shock as high interest rates lead to a thinning of global inventories, top analyst Amrita Sen warned in the Financial Times. That destocking is keeping oil prices low for now, but she predicted commercial inventories will eventually fall to their lowest levels in more than a decade, leaving little room for market surprises.
This trend is the result of tighter monetary policy, said the Energy Aspects co-founder. Higher interest rates have forced traders to pay more to finance oil inventories. “For oil refiners and trading companies, the cost of storing oil in tanks has become much more expensive,” Sen said, and the increased cost of financing would also mean that the penalty for being caught with unsold product (should a recession turn into a contraction of demand) is higher than before.
Historically, a one percentage point rise in interest rates in developed countries would reduce crude stocks by an average of 10 million barrels year-on-year, she said. In 2000, for example, the US similarly raised interest rates while Opec’s oil production fell. As a result, oil supply in the developed regions fell by 6 percent.
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Sen pointed out that similar dynamics are currently playing out, albeit with a tighter Federal Reserve and OECD crude supply below the 2010-2019 average. Meanwhile, today’s backwardation – a situation in which oil prices trade at a higher rate in the short term than they do over the longer term – continues to discourage traders from stockpiling oil. “The market is on thin ice,” she said.
In Asia, Sen said some refiners are concerned that destocking is too far advanced and are trying to replenish stocks with Saudi crude despite recent price hikes. In the US, inventories remain low after the federal government tapped the strategic oil reserve last year to slash prices. “All of this will leave the market vulnerable to shocks and unexpected policy actions from OPEC by year-end,” she said. “Buckle up!”
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