With an OPEC+ ministerial meeting due in less than four weeks and prices trading well below the levels that most ministers would consider indicative of a healthy and balanced market, there is a question as to why the zeitgeist among traders remains so bearish.
That’s what analysts at Standard Chartered Bank, including the company’s Head of Commodities Research, Paul Horsnell, said in a report sent to Rigzone late Tuesday.
“We think there is only one explanation that might hold enough water to fit the combination of OPEC+ signaling for higher prices but traders pushing prices lower,” the analysts stated in the report.
“We think the dominant view among traders has become so pessimistic about oil balances that they believe a continuation of current levels of production restraint will be forced by fundamentals rather than a proactive decision to tighten balances,” they added.
Finding the source of this pessimism raises another set of questions, the analysts noted in the report.
“The current set of oil balance forecasts from the main agencies would not seem to support extreme pessimism,” they pointed out, adding that their own forecasts also show no structural surpluses.
“Likewise, if the downbeat view is based on general economic conditions, the same pessimism does not seem to have been reflected in other asset classes in the wake of the May Fed meeting,” the analysts noted.
The Standard Chartered Bank analysts also highlighted in the report that a “highly unscientific straw poll of traders” revealed “very little” to them “in the way of a dominant concern or any consistency between concerns.”
“For some traders, oil price bearishness comes from a concentration on the negative tail of potential economic outcomes; others believe that current Middle East geopolitics will lead to changes that are bearish for oil; and others think the supply and demand models are all wrong and market data is concealing significant surpluses,” the analysts said in the report.
“If there is one concern that seems to rise to the fore more than others, it is weak US transportation fuel demand; While that perception may be widely prevalent, we think there is little foundation for it in reality,” they added.
“We found very few traders who have picked up on recent OPEC signals, particularly the schedules for payback of past over-target output volunteered by Iraq and Kazakhstan,” they continued.
In the report, the analysts said they do not share the market’s “apparent evaluation of weak balances, poor demand, benign geopolitics, and either an ineffective or disinterested OPEC+.”
“In particular, there seems to be a belief (one we would argue against strongly) that there is very limited scope for OPEC+ ministers to either improve market sentiment or, in the extreme, shock the market into a sudden reappraisal of near- and medium -term fundamentals,” they added.
The analysts pointed out in the report that it is not clear to them “which of improvements in weekly oil data, macroeconomic sentiment, or oil producer actions is most likely to move the market higher over the next month” but added that they think that at least one of them will play a significant role.
Standard Chartered analysts also highlighted in the report that their money-manager crude oil positioning index remains close to a neutral value of zero.
“This indicates that speculative positioning relative to open interest is close to the middle of its five-year range,” they added.
“There are, however, some significant differences across Brent and WTI contracts… the individual crude oil contract positioning indices range from -85.9 (ICE WTI) to +28.9 (ICE Brent),” they continued.
“At the top level there was little net change in aggregate across the four main Brent and WTI contracts, with overall net week on week buying of just 0.128 million barrels in the latest data. However, the swings among the contracts were highly divergent; the ICE Brent contract saw 17.29 million barrels of net buying, while the ICE WTI contract saw 10.77 million barrels of net selling,” they went on to state.
“With the positioning indices for the main oil product contracts all negative, money managers are overall short oil, but the limited extent of that short suggests that it is far from being overextended,” they said.
In a separate report sent to Rigzone on Wednesday, Macquarie strategists said they expect the Brent oil price to remain range bound between $80 – $90 Brent through the second quarter, adding that, “at this point, we believe the odds are greater that oil falls below $80 versus consistently rising above $90 given the slow but steady march towards a cease-fire and increasingly bearish fundamentals.”
“Following 2Q24, we anticipate oil will become bearish due to NOPEC supply growth, OPEC+ spare capacity returning to market, and demand disappointment as a result of stubborn inflation,” the strategists warned.
In the report, the strategists noted that, over the past month, crude price has fallen by around $8 per barrel from its highest point since last October. Part of the sell-off can be attributed to a reduction in geopolitical risk premium as the market becomes more comfortable that an current supply disruption is a low probability, the strategists said in the report.
“This reduction is largely a function of the perceived de-escalation of the situation between Israel and Iran,” they added.
“Additionally, we have seen structure softening alongside flat price with prompt spreads at their lowest level since early February. The softening of structure has been done in the April global crude inventory build,” they continued.
Both WTI and Brent speculative net length shrunk over the previous week, the strategists stated in the report.
“WTI net length… [fell] by 23.3 while Brent decreased by 4.8K. WTI + Brent Managed Money net length flipped and posted a slight increase of 958 contracts following the prior week’s decrease of 63.4K,” they said.
“This represents the largest week on week change in combined flow since mid-March which saw a 125K difference. WTI spec net length moved down driven by over five times new short interest than added longs,” they added.
“Brent demonstrated a smaller change with added shorts exceeding new longs. Lastly, commercial participants increased length for both WTI and Brent combining for 37K contracts,” they continued.
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