The oil price rally continues to display strong momentum as tightness in the physical markets shows no sign of easing. The past seven trading days have all seen new year-to-date-highs set for front-month Brent, with the latest hitting a 10-month high above $95 per barrel (bbl). According to commodity analysts at Standard Chartered, there have been higher intraday highs over the past eight trading days and for 16 of the past 18 trading days, with WTI recording a similar pattern.
The oil price rally has also been accompanied by a sharp drop in volatility with prices pointing in one direction--higher. According to StanChart, realized annualized 30-day Brent volatility stood at a 26-month low of 16.2% at settlement on 18 September; with volatility having been lower on only two days since the start of 2020. StanChart estimates that gl;obal oil markets are facing a 3 million barrels per day deficit.
However, projecting the oil price outlook just a few months out is proving to be a challenge, with prognostications by different experts varying by quite wide margins. Interestingly, the most bearish Q4 view is that by U.S.-based Energy Information Administration (EIA), which has forecast a Q4 call on OPEC and inventories (i.e., the level of OPEC output that would keep global inventories unchanged) of 27.8 mb/d, a level within the range of estimates of OPEC output in July. The OPEC Secretariat survey of secondary sources puts OPEC output at 27.45 mb/d, the International Energy Agency (IEA) estimates it at 27.96 mb/d and the EIA estimate is 27.03 mb/d. In effect, the EIA forecast implies a roughly balanced market with a significant possibility of a surplus should demand fall or OPEC output move higher. Related: Chevron Agrees To Terms That Could End Strike At LNG Facilities
In contrast, the OPEC Secretariat has forecast a Q4 call on OPEC of 30.7 mb/d, an additional 2.9 mb/d above the EIA estimate evenly split between a higher demand forecast and a lower non-OPEC supply forecast. In effect, the OPEC Secretariat forecast implies a very high probability of a large global stock draw. The IEA has a Q4 call on OPEC forecast between the two extremes at 29.0 mb/d, a 0.9 mb/d downwards revision in the latest report.
Meanwhile, StanChart has predicted a Q4 call on OPEC at 28.8 mb/d, saying it expects global inventories to draw by 1.3 mb/d in Q4, lower than its earlier estimate at 2.1 mb/d. StanChart says it expects the draws to continue through H1-2024, with the call on OPEC increasing 0.8 mb/d q/q to 29.6 mb/d in Q1 and increasing a further 0.5 mb/d q/q to 30.1 mb/d in Q2 2024.
Ultra Bullish Hedge Funds
It’s looking increasingly likely that the oil bulls will have the last laugh, if ongoing bets by money managers are any indication.
Back in June, we reported that legendary oil trader Pierre Andurand had seen his hedge fund suffer the worst-ever loss after the oil prices reversed course. Andurand’s main Andurand Commodities Discretionary Enhanced Fund, which makes leveraged bets, lost more than half of its value in the first half of the year, a sharp contrast to the more than sevenfold return it recorded in the previous three years.
The fund, which Andurand runs with no set risk limits, suffered catastrophic losses after Andurand earlier this year predicted that oil prices may exceed $140 a barrel by the end of 2023. Unfortunately, elevated inventory levels, rising supplies by Russia, Iran and Venezuela, weak global demand and sub-par recovery by the Chinese economy lay waste to Andurrand’s bets.
Meanwhile, short sellers were running amok in the oil futures market, with commodity analysts at Standard Chartered at one point reporting that speculative short volumes were more than six times larger than those after the collapse of Lehman Brothers and Bear Stearns in 2008.
Luckily for the bulls, the oil price outlook has improved quite dramatically, with hedge funds now placing the most bullish wagers in more than a year after the extension of cuts by Saudi Arabia and Russia have sent crude surging 30 per cent since mid-June. Money managers are now the most bullish on U.S. crude since June 2022.
At least two oil experts have predicted that Brent prices will cross above $100 per barrel in the final quarter of 2023, though neither is confident that price level is sustainable. Brent was trading at $94.11 per barrel in Wednesday’s intraday session.
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By Alex Kimani for Oilprice.com
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