Spotlight: While significant, the oil price recovery has lagged other assets

A version of this Spotlight from S&P Global Platts Analytics was first published February 10.

The price recovery in oil has been rather remarkable given that less than a year ago we witnessed extremely low pricing with physical oil benchmarks approaching $10/b and the WTI futures contract even dipping below $0/b on that infamous day in April of 2020.

The fundamentals have indeed improved since then, though inventories remain significantly higher year on year (by some 450 million barrels across major oils per our estimates), refining margins are weak, and physical differentials remain below pre-COVID-19 levels. Despite these persistent headwinds to the physical oil markets, outright oil prices are now higher versus last year and only slightly below pre-COVID-19 levels in Q4 2019.

On the surface this seems counterintuitive, but other narratives move the price of oil beyond just inventories and demand. One main underlying current that impacts oil is the notion of inflation… or more importantly, inflation expectations. That has ramped up as the US deficit increases dramatically amid significant fiscal stimulus measures.

This has helped many assets, including commodities, find nominal support to their pricing as the value of the dollar has fallen relative to most other currencies over the past year.

While the support to pricing has been broad based, we note that oil has lagged other assets, most importantly other commodities, which helps demonstrate some of the headwinds the oil market continues to face.

On a nominal basis, the recovery seems to be getting ahead of itself a bit, as we don't expect the fundamentals to improve materially until the summer. However, on a relative basis, oil weakness is more apparent, and we must keep an eye on how these relationships play out going forward in addition to some of the macro underpinnings helping support all assets.