The “Weird Set-Up” in Oil

I sat down with Paulo Macro on Talking Markets this week to discuss the current oil set-up, why the market keeps fading geopolitical risk, the event horizon for demographics, and more.

There’s something weird happening in the oil market,

PauloMacro

told me on Talking Markets this week. Oil prices are slumping despite a backdrop of escalating geopolitical tensions. Why?

Geopolitical Risk Faded

Investors have consistently faded geopolitical risk since Russia invaded Ukraine two years ago, Paulo said. Events that threatened to disrupt oil supply, such as the U.S. Strategic Petroleum Reserve releases, sanctions on Russian exports, and Iran flooding the market with discounted crude, have been met with shrugs by the market.

“It’s become almost Pavlovian conditioning for investors to harvest geopolitical premium,” Paulo said. “We could be on the precipice of a real rupture in the region and there is absolutely no premium for war or geopolitical risk in the barrel right now. That’s incredible to me.”

Divergence Between Physical and Paper Markets

Then there is the stark divergence between the physical and futures markets for oil. While futures markets signal weakness, physical market indicators suggest otherwise. Paulo highlighted the persistent premium for dated Brent crude, which is priced for immediate delivery, over future months, indicating robust immediate demand.

He added that time spreads remain backwardated — near-term prices are higher than future prices — a condition that discourages storage and encourages immediate consumption.

Unprecedented Net Short Position

Paulo also pointed out an unprecedented net short position across the entire oil complex. This situation, gleaned from the Commitment of Traders report, marks a historical first. Typically, such a scenario implies that commercial entities, who use futures contracts to hedge their physical positions, are net long, while speculators are net short.

However, the current dynamic reveals the opposite: commercials holding long positions against short speculators, which could lead to a short squeeze.

A Buying Opportunity… But with Caution

“It's a unique setup I think for people to take a constructive view on the complex and pick their spots because if you don't buy when everybody's bearish when do you?” said Paulo.

“Either there's something terrible right around the corner, which is not my base case, or this is one hell of an opportunity to reload on energy.”

However, he stressed that navigating the volatility of the commodity markets requires expertise, careful risk management, and an active investment approach rather than a passive, index-tracking strategy.

“Nothing that we've talked about here is investment advice,” he said. “Speak to a financial adviser to see what's appropriate for you as we're all in a different place at any point in time with our finances.”

Watch the full episode for free here.

Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and determine if an allocation to oil aligns with your overall financial plan