EIA oil supply vs. demand overlaid with generic first WTI future

Image 1: EIA oil supply vs. demand overlaid with generic first WTI future
Source: Bloomberg

It goes without saying that all commodities are going to be impacted by the changing perception of supply and demand. However, I have always found two things when it comes to the oil market. First, consumption has trended higher over the last 20 years with the exception of drops during the Great Financial Crisis and Covid-19. Second, the changes in supply will tend to have more of an impact, particularly in the short term, for the price of oil. Unless, of course, we are in the midst of a bad recession. Given none of the data suggests we are in the midst of a bad recession, the focus on supply should be our key focus. To show you this visually, I have plotted the difference between supply and demand as measured by the EIA in white, then versus this difference, I plotted the generic first WTI futures. I have put bands around this at +/- 1.5%. We can see that when supply outstrips demand by more than 1.5% (i.e., the white line is falling) the price of oil is negatively impacted. Yet when supply is less than demand by 1.5%, the white line rises above the band, which means this is positive for oil prices. The impact of the extra supply coming from the draining of the U.S. SPR in 2023 is seen pressuring the price of oil. In 2024, there have been some concerns that supply would be disrupted by the various global conflicts, as well as concerns that OPEC+ would grow the amount produced. However, when all is said and done, I can see that supply and demand is largely in balance, which is why the futures price has largely been in a range this year.


Extreme weather events and the impact on price of oil

Image 2: Extreme weather events and the impact on price of oil
Source: Earth Observatory, NASA

With that said, there can be exogenous shocks that impact the supply of oil in the short term. News in the past few days reports that we have the earliest ever Category 5 hurricane developing in the Atlantic, Hurricane Beryl, has added intrigue and uncertainty into the outlook for supply. This is about a month earlier than we typically see storms develop, which tends to happen in August. While this storm may not directly impact supply, the notion that we have had three measurable storms develop in June, instead of August, points to a potentially more active hurricane season this year, which has the risk of negatively impacting supplies in the Gulf of Mexico as we move throughout the year. This is uncertainty that traders will have to wrestle with, which has the potential to put upward pressure on prices.


Commitment of Traders report for WTI Crude Oil

Image 3: Commitment of Traders report for WTI crude oil

Generic front month WTI Ichimoku cloud chart


CVOL for the Energy market (top) and the time series for WTI CVOL (bottom)


Implied volatility surface by delta for all expirations of CL options


Expected return and breakeven for LO2N4 weekly 81-82.5-84 iron butterfly