The predominant theme in the markets is the “reflation” trade. For those who have been living in a Scientology compound since November 2016, the reflation narrative goes something like this -> the global economy was improving before the election; Trumponomics (infrastructure spending and tax cuts) will be supportive of a strong economy; asset prices will move higher as the US economy grows at 4%+. BUT…if oil breaks $50, the reflation narrative could fail.
BK has argued that due to the Saudi Aramco IPO, Saudi Arabia has a vested interest in keeping the price of oil high enough to support a strong valuation, but not too high as cause another US shale led supply response. So far the line in the sand appears to be ~$50.
The Saudi Plan to keep oil prices elevated has worked but is now threatened by market forces. First, the days supply of oil in the US is at a level not seen since the oil bust of the 1980’s (yep, JR Ewing style).
Second, speculators have not been this long of oil futures since 2006 (green line in the chart below).
The way the supply/demand fundamentals line up, coupled with market positioning means that if $50 cannot hold then we could see a non-trivial decline in oil. In turn, this would blow a whole in the reflation narrative.