It could be a bad combination. Olivier Jakob of Petromatrix points out that one of the key factors keeping investors in crude futures – namely, rising prices – could turn out to be a problem if a couple of other recent themes continue – namely, the return of the Brent premium over WTI, combined with a strengthening dollar.
Rising crude prices, he writes, mean that passive funds tracking indices such as US Oil and GSCI continue to attract investors, adding:
The growing problem however is that the continued buying into oil commodities is still done despite the rise of the Dollar Index and on top of it with Brent at a premium to WTI this is starting to make life more difficult for the non-USD economies that are supposed to fuel the oil demand recovery.
And some example of those economies are:
Yesterday, it was Taxi drivers in Lebanon that were blocking the cities in protest of high fuel prices, early this week it was Taxi drivers in South Africa doing the same. Last week Taxi and truck drivers went on strike in Ivory Coast over high fuel prices and the government was forced to lower prices after the Cocoa exports were put at threat. Next week (April 27th) it is the turn of India to organize mass protests against the fuel prices in an effort to force the government to reverse the price increases.
He finishes with a warning:
Buying WTI on the S&P500 correlation has been a winning trade so far this year and some asset managers will still have faith in that theme but the widening contango is a growing cost to a pure correlation trade, while the rising Dollar is a growing risk to the oil demand growth in non-USD economies.
Best watch out for that.