Last month, we reported that energy experts are growing increasingly bearish on the oil price outlook compared to previous sentiment. Four energy agencies, including the International Energy Agency and the OPEC Secretariat, have made their forecasts for oil demand growth in 2023, and the one common theme is that all four agencies expect demand growth compared to 2022, but all are less optimistic than they were a year ago. or so. .
Previously, the OPEC Secretariat was the most optimistic, forecasting demand to grow by about 2.3 million barrels per day, while the International Energy Agency (IEA) sees demand increasing by 2.0 million barrels per day. At the lower end of the spectrum, Standard Chartered is the least optimistic, seeing demand growing at just 1.3 million bpd, while the US Energy Information Administration (EIA) expects growth of 1.4 million bpd.
But these economists are now riding to the upside even as the overall market trend is picking up.
The International Energy Agency (IEA) published its monthly Oil Balances report on Tuesday
May, about a week after similar reports were released by the Energy Information Administration (EIA) and the OPEC Secretariat. Commodities experts at Standard Chartered have created a heat map of demand forecast changes, including changes to their own, in the latest reports for one and three months ago. You’ll notice that the heatmap provides a positive outlook for demand, with most estimates for the 2023 quarter and the annual average moving higher over the two time periods. Interestingly, the biggest bullish revisions came from the more bearish agencies such as StanChart and the EIA, while the more bullish agencies including the International Energy Agency and OPEC did not change significantly.
In sharp contrast, there is a disconnect between what energy economists see in the data and what speculative traders act upon. Oil prices have touched multi-year lows on several occasions over the past two months, with Stanchart speculating that the breakaway may be a result of the increasingly top-down nature and overall drive of oil market sentiment.
Source: Standard Chartered Research
Short sellers take over
Indeed, short sellers are becoming more emboldened and threatening to overrun the markets.
The collapse of the Silicon Valley bank in March triggered a massive capital flight from oil to precious metals, as panic spread that this could be the start of another banking and financial crisis.
According to commodity analysts at Standard Chartered, the collapse of SVB led to the fastest-ever move to the short side in oil markets, with speculative short volumes six times greater than those after the collapse of Lehman Brothers and Bear Stearns in 2008. Money-becoming-manager positions The four major futures contracts for Brent and WTI are short by 228.9 million barrels in just two weeks.
As expected, oil prices fell to multi-year lows in a matter of days before mounting a tepid tide thanks to the April 2 decision by some OPEC+ members to make voluntary production cuts. Related: Chances of the World Getting to Net Zero by 2050 Unlikely: Exxon
Unfortunately for the bulls, the shorts are now back with a vengeance.
Last week, Stanchart reported that money manager positions across the four major Brent and WTI futures contracts had grown shorter by 184.6 million barrels over the past two weeks, a pace only surpassed by the increase in speculative short sales after the SVB crash, and at the start of the pandemic.
At this point, it is not clear whether these sharp fluctuations in the same direction are caused by traders over-reliance on similar algorithms. And just like us, Stanchart says excessive bearishness is overrated relative to the news flow and fundamental fundamental data.
Crude oil inventories fell below the five-year average for the first time this year.
US inventories and oil prices usually have a strong inverse relationship, with lower inventories pushing prices higher while higher inventories have the opposite effect. However, large inventory draws over the past two weeks have failed to prevent a significant drop in prices. As noted by Standard Chartered’s commodity analysts, these disruptions tend to be temporary and come at times when prices are mainly driven by other oil market fundamentals, expectations, broader asset markets and financial flows. In this case, the recent optimism about OPEC+ production cuts failed to offset concerns about demand related to the weak economic backdrop and a hawkish Federal Reserve that kept oil prices within the set range. Moreover, reports have emerged that Russian crude shipments are still strong despite sanctions and embargoes: Reuters reported that oil shipments in April from Russia’s western ports were on track to hit their highest levels since 2019 at more than 2.4 million barrels per day.
very bearish
As we indicated before, it is difficult to find a suitable justification for the increasing decline in the oil markets.
According to the International Energy Agency, global oil consumption is still on track to rise by 2 million barrels per day this year to an all-time high of 101.9 million barrels per day. Inventories are gradually shrinking and are expected to deplete further as OPEC+ implements new production cuts. Crude oil inventories fell below the five-year average for the first time this year. Last week, implied demand for gasoline rose by 992,000 barrels per day (kb/d) to a 15-month high of 9.511 million bpd.
Stanchart predicted that the OPEC+ cuts will eventually eliminate the surplus that has accumulated in global oil markets over the past two months. According to analysts, a large oil surplus began to grow in late 2022 and spread in the first quarter of this year. Analysts estimate that current oil inventories are 200 million barrels higher than they were at the start of 2022 and 268 million barrels higher than the June 2022 minimum.
However, they are now optimistic that construction over the past two quarters will be over by November if the cuts are maintained throughout the year. In a slightly less bullish scenario, the same would be achieved by the end of the year if the current cuts are reversed around October. This should support prices.
Meanwhile, natural gas prices are expected to pick up in the latter half of the year as Europe continues another buying spree. Europe has failed to secure enough long-term LNG contracts to compensate for the cutoff of Russian gas imports, and Reuters predicts that this will be costly next winter and could severely narrow the market. The European Union views natural gas as a bridging fuel in the transition to renewable energy, and buyers generally struggle to commit to long-term contracts. This means that Europe may have to buy more in the spot market as it did in 2022, which in turn is likely to push up prices:
“Ever since Europe’s Green Lobby wrongly convinced politicians that hydrogen could largely replace natural gas as an energy carrier by 2030, Europe has come to rely heavily on spot and short-term purchases of LNG.Chancellor Morten Frisch told Reuters.
By Alex Kimani for Oilprice.com
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