Pain trade, weak forward USD and inflation makes forward oil prices are a real bargain

The sell-off in global equity markets accelerated yesterday dragging both front end and longer dated crude oil contracts lower. Since one week ago the front end of the crude curve is down 4.1% while the Dec-2020 contract is down 3.5%. In our view the forward Brent Dec-2020 contract is now a real bargain in real terms our view when adjusting for weak forward USD as well as Euro inflation over the next three years. The current buying opportunity could get even better if the all-time high crowd of long specs decides to head for the exit door. The forward buying opportunity is however already very, very good in our view.

The intensity of the equity sell-off has not yet reached the oil market. We know that speculative positions both in terms of contracts and in allocated USD is at an all-time high. Thus a real pain-trade has not yet hit the oil market. Longs have not yet started to flock to the exit door. If that happens it will make the buying opportunity even better for the oil consumers who buy oil on the forward curve. However, already here and now the forward Brent crude Dec-2020 is a bargain in our view. The best way to view this is through the lens of the Euro thus capturing both forward priced USD weakness and Euro inflation. The forward Brent Dec-2020 is this morning trading at €43.2/bl. In real terms it is even lower at €41.5/bl when adjusting for Euro inflation the next three years. Except for very brief dips the Brent 1mth contract in euro has not traded below this level other than during the period of the deep sell-off from November 2015 to June 2016. Thus for all non-US based consumers the current forward prices are a bargain in real terms and it could become even better if the sell-off accelerates. It is probably just as good in dollar terms but then it is not so easy to visualize the forward priced USD weakens to 2020.

Chart 1: Brent crude 1mth contract in Euro/bl and current price of Brent Dec-2020 in Euro/bl and Real Euro/bl (inflation adjusted)

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking