In this week’s RBC’s Markets in Motion podcast, Michael Tran, Commodity and Digital Intelligence Strategist, guest hosts to discuss his latest views on the global oil market dynamic.

Today in our 11:30 minute podcast, we discuss the recent oil price volatility and explore the dynamic between the push and pull between the looming threat of a recession which is being stacked up against the strongest fundamental oil market set up in decades, or maybe even ever.

Three things to know: First, given the recent price rout, the financial oil market is dislocating dramatically from an extremely tight spot physical market. Near record Atlantic Basin physical pricing differentials, the Saudi hike to Official Selling Prices (OSPs) and the CPC pipeline outage are indicative that the steadfast physical market is telling a diametrically opposed story to the plunging paper market. The physical market is pricing in scarcity while the financial market is pricing in recession.

Second, despite the recent plunge in oil prices, term structure remains relatively intact, surprisingly. This means that the term portion of the curve is also retracing significantly lower. Unless the recession is deep and protracted, we believe that the dated calendar strips are largely undervalued. However, the near term recessionary risks must be respected. In a recessionary scenario in which demand is impacted at a similar rate as previous downturns, we could see a scenario in which spot prices retreat into the mid $70/bbl range in the back half of this year. Now, we only place a 15% probability to such an outcome, but we have all been doing this long enough to know that oil price moves can be swift, violent and unforgiving, in both directions. The bullish conviction is high, but sentiment is soft among the commodity trading community.

Third, while the debate regarding the health of the consumer remains an open ended question, large scale demand destruction is rare. Over the past 30 years leading into the pandemic, there were 39 individual months in which retail gasoline prices increased by more than 30%, YoY. Of those instances, we have seen gasoline demand fall by 2% or more on only 12 of those occasions. And five of those instances took place during the 2008 Great Financial Crisis. In short, protracted demand destruction events have historically been rare, absent a recession. That said, the strength of the US dollar means that oil priced in local currencies is still punching in either at or near all-time record highs for many regions across the globe.