The story with oil, much like most commodities, has mostly focused on two factors: tight correlations with other macro products and China. The correlations can be reasonably expected to weaken a little once we are a little further into the deleveraging process and once we see a more familiar phase of the business cycle but until then, it's something to watch very closely. As seen below, it's definitely not something to be ignored.
The China demand picture has been widely overdone and the ensuing bubble has been a continuing theme on this blog over the past 4 months. As seen below, the factors of demand are much more liquidity driven than by anything close to resembling production fundamentals. Of course, this source of demand has a lot more stamina than most would care to ascribe with regard to such an artificially propped up boom but should also be considered when evaluating the term structure of crude futures.
With crude stockpiles accumulating at historically high seasonally adjusted rates, the picture is not likely to improve. Compounding the matter is the deteriorating picture in the MidEast; OPEC agreements are tough to push when the massive state-run welfare states of many of its members start grinding down. As seen below, the supply picture is not encouraging.
Finally, US demand will continue to be weak, even post-recovery. This has been a theme we have been running in parallel with our China pieces since mid-April and has been gaining steam in various forms (e.g. PIMCO's "new normal", aggregate demand forecasts, permanently increased US household savings rate, etc.) As the below graphic shows, commodity forecasts continue to be bearish.
Thanks to Morgan Stanley for charts