Earlier this week, oil reversed a four-week losing streak pushed higher by production shut-ins in Canada and analyst expectations that the tightness of supply is about to manifest itself during peak demand season.
Yet traders have been selling oil and fuels these past weeks, and they might need more time to stop. Since April 18, hedge funds and similar entities have sold the equivalent of 249 million barrels of crude, Reuters' market analyst John Kemp reported in his column this week. The amount represents half of their previous positions in oil.
It's hard not to see the reason for the selloff: there has been so much being reported about a looming recession in the United States. Even if things don't get as bad as a full-blown recession, inflation remains a substantial problem with a potential negative impact on prices.
Yet, as Kemp notes, prices have now dropped below their long-term average for this time of the year. This would normally suggest it's time for a correction and position traders at the ready-steady-go line. Yet it hasn't. Few seem to believe oil is going to start climbing again in the coming weeks.
Analysts expect it though a bit further out, in the second half of the year. Dutch ING commodity analysts, for example, recently forecasted a much tighter oil supply situation in the second half of the year driven by growing demand from non-OECD countries and a smaller-than-expected increase in U.S. production.
Morningstar energy strategist Stephen Ellis said recently that the time may have come to buy the dip. "We have near-term surpluses for the first half of 2023, but we expect Chinese demand to come back up and pinch demand a bit," Ellis said.
Goldman Sachs' Jeffrey Currie is of a similar opinion. Speaking on the sidelines of an event in Saudi Arabia this weekend, Currie also noted demand pick-up from China but also mentioned spare production capacity. According to him, this could dwindle by next year enough to send oil prices back into three-digit territory. Related: Saudi Aramco Considers Another Stock Offering In Riyadh
Of course, Currie also said that sanctions would reduce Russian oil exports, and this has not really started to happen yet, contrary to most predictions, so there is always a bit of uncertainty remaining. In this case, it is quite a lot of uncertainty because of the size of Russia's exports.
Based on the current sentiment in oil trading circles and the cautious approach they are displaying, one could suggest that the market would need something even bigger than the more than 300,000 bpd in shut-in Canadian output to rekindle interest in oil buying.
Perhaps a flare-up in regional tensions as Iran seizes a third foreign tanker and the U.S. ramps up its military presence in the Persian Gulf could do the job. It hasn't yet, possibly because the third tanker was actually Iranian, and Iran said it was reclaiming it after a foreign seizure, but it might yet do the trick.
OPEC+, meanwhile, remains one of the main factors to consider... and it doesn't seem to be planning more output cuts. On the face of it, that could seem bearish if one assumes the only point of the latest cuts was to push prices higher. But reservations about further cuts might point in another direction. It might mean that as peak season begins, OPEC+ would expect the rise in demand to do the job for prices.
That rise might never materialize, however, as Cit's Ed Morse recently noted in comments about the immediate future of oil prices. What's some more uncertainty when it comes to oil, after all?
"We foresee neither a turning point in demand growth to the upside nor to inadequate supply from non-OPEC. If anything, the chances are that demand will continue to underperform expectations through the year just as demand has disappointed globally year-to-date," Morse said, as quoted by Livewire Markets.
It seems traders think so, too, at least for the time being.
By Irina Slav for Oilprice.com
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