10 things you need to know about the oil rally

1 - Overbought mania

Let's start with a simplistic price momentum observation. Oil RSI is getting rather extreme, but as regular readers of TME know, overbought can stay overbought for longer than most think possible...

Source: Refinitiv

2 - Oil of course also the star in commodities

Oil has decoupled from other commodities over the summer.

Source: Goldman

3 - What's the probability of >$90?

Higher for longer? Option markets are pricing a 45% probability of Brent staying above $90/bbl by YE23.

Source: Goldman

4 - Many things have lagged

Energy-related assets have broadly lagged its beta to oil. Chart shows return vs. expected return based on relationship to Brent.

Source: Datastream

5 - Equities lagging

EU Energy sector relative performance vs oil price.

Source: JPM equity strategy

6 - Equities care less than normal

The S&P 500 has been less positively correlated with Brent.

Source: Goldman

7 - Late cycle performer

Energy is typically a late cycle outperformer.

Source: Morgan Stanley

8 - Hedge funds on the sidelines, computers not

Hedge fund exposure to the energy sector is very low (chart 1). CTAs on the other hand have increased their oil long aggressively during the latest squeeze (chart 2).

Source: MS PB

Source: Deutsche Bank

9 - Here comes the positive earnings revisions

Energy earnings revisions turning higher.

Source: Morgan Stanley

10 - Oil and inflation

Short-dated breakevens have spiked. MS's Ellen Zentner and team sum it up: A 10% increase in oil prices due to a negative supply shock will raise the headline CPI by 0.35% for 3 months, while only marginally affecting the core CPI (by 0.03%). This suggests a short-term spike in inflation. The Fed is expected to overlook this temporary fluctuation...unless it is a longer term story.

Source: MS

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