Money managers have grown increasingly optimistic about a recovery in oil prices and have raced to close out bearish bets on petroleum futures over the past month.
Shrinking supply due to the OPEC+ and Saudi Arabia’s cuts and resilient demand despite recession fears – with oil consumption estimated to have already set record highs in July – have made fundamentals look increasingly bullish for the rest of the year. Macroeconomic sentiment in the oil market has also improved, with Fed cues that the U.S. could manage to avoid a recession and expected stimulus in China, the world’s top crude oil importer, to prop up an unconvincing economic rebound after the end of the Covid restrictions.
“The market has abandoned its growth pessimism,” Goldman Sachs analysts wrote in the note this weekend.
Judging from the hedge fund positioning in the latest reporting week to July 25 and the four weeks prior, market participants started to expect oil prices to move higher as Saudi Arabia began its unilateral cut of 1 million barrels per day (bpd) for July and August.
The Saudis have succeeded in changing the perception of market balances for this year and next, and – as Saudi Energy Minister Prince Abdulaziz bin Salman has frequently said – “punish the short sellers.” Related: Oil Prices Jump As Saudi Arabia Extends Oil Production Cut
In the most recent week with data from exchanges, portfolio managers bought the equivalent of 52 million barrels in the six most important petroleum contracts, according to estimates by Reuters market analyst John Kemp.
Over the past month, hedge funds have slashed short positions and added fresh longs, expecting a tighter market this summer and an improved macroeconomic picture in the United States.
In the WTI contracts, the bullish bets increased by the equivalent of 65 million barrels between June 27 and July 25, while the bearish bets were slashed by 104 million barrels, Kemp’s estimates on data from exchanges show.
The net long positions—the difference between bullish and bearish bets—in WTI Crude and Brent Crude jumped to a three-month high in the week ending July 25.
Oil prices have also hit the highest in three months, shaking off some of the economic doom and gloom and expectations of a hit to oil demand.
Demand is not only resilient but headed for a record high in the coming months, according to analysts including Goldman Sachs and oil executives, including ExxonMobil’s CEO Darren Woods.
The world will see a record-high demand for oil this year, Exxon’s top executive told CNBC on Friday.
Global oil demand reached a record high of 102.8 million bpd in July, Goldman Sachs analysts wrote in a note on Sunday. The Wall Street bank expects the robust demand to lead to a wider-than-expected deficit of as much as 1.8 million bpd in the second half of 2023 and to 600,000 bpd deficit in 2024.
Demand looks stronger than many had expected early in the second quarter.
Oil demand outside China is holding up “far better” than most have feared, while the very aggressive OPEC+ cuts are leading to a deficit on the market, Jeffrey Currie, Goldman Sachs’s global head of commodities research, told CNBC on Monday.
As a result of the expected deficits, Brent Crude prices could rise to $93 a barrel in the second quarter of 2024, according to Goldman Sachs.
Early on Wednesday, Brent was trading above $85 per barrel, and the U.S. benchmark, WTI Crude, topped $82 a barrel for the first time since the middle of April.
The macroeconomic sentiment has also improved, with the recent inflation data from the U.S. showing slowing price increases and China expected to support its economy out of the slower-than-expected growth in the second quarter.
In the current macro and fundamentals environment, “Oil remains one of the most attractive trades and buyers will likely emerge on every dip,” Ed Moya, senior market analyst at OANDA, said on Tuesday.
By Tsvetana Paraskova for Oilprice.com
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