Traders are not buying the oil deficit story. That's the conclusion that forces itself based on the latest oil and fuel buying and selling developments ahead of the latest OPEC+ meeting.
The price movements that followed that meeting were proof that this attitude was correct. The initial price jump that every production cut announcement from OPEC+ causes fizzled out less than a day after the announcement.
Over the past six weeks, institutional traders have reduced their positions in crude oil and fuels by 238 million barrels, Reuters' John Kemp reported earlier this week, which was one of the lowest weekly positions in those contracts since 2013.
These six weeks were marked by some strongly bearish developments reinforcing the sentiment, such as weaker than expected Chinese economic index readings and the U.S. debt ceiling negotiations.
It appears that traders have focused entirely on those economic index readings instead of the fact that Chinese crude oil demand hit a record in April despite refineries shutting down for seasonal maintenance.
They also did not really acknowledge U.S. legislators' success in passing the debt ceiling bill that averted a federal debt default, even though the uncertainty surrounding the issue was a major driver for bullish behavior on the oil market.
Perhaps this has something to do with news about a recession in the U.S. manufacturing and freight transport sectors, which has hurt oil consumption in these industries. It seems that institutional oil traders have been focusing almost exclusively on consumption lately. Related: Shell Halts Unit At Europe's Biggest Refinery Due To Leak
If analysts, who almost invariably predict much higher oil prices for the second half of the year, are right, this could boomerang. But if traders' fears of a recession materialize, oil prices will be going nowhere near $100. In fact, prices might even fall further.
This would be good news for the White House: it has set a range of $67 to $72 per barrel to refill the strategic petroleum reserve. The twist is that the moment the Department of Energy starts buying oil for the SPR, prices will jump.
It will not be good news for OPEC, however. The cartel cannot keep cutting deeper and deeper - at some point, this will start playing to the advantage of U.S. shale. In fact, according to some, it already is, with analysts predicting higher U.S. exports as Saudi Arabia trims production by another 1 million bpd.
Meanwhile, Germany has officially fallen into recession, which has likely reinforced expectations of a faster slowdown elsewhere as well, which has dampened appetite for oil, inelastic or not. And since the non-news of the German recession broke after months of upbeat messaging that the worst was over and the EU's largest economy was in fact, recovering, hedge funds and other institutional traders have every reason to play it safe.
The U.S. is not out of the woods yet, either. Per Reuters' Kemp, "Only the residual strength of service sector spending has so far prevented the "industrial recession" becoming a whole-economy recession."
That wouldn't be a good sign for oil demand in the world's largest consumer, and oil traders appear to be acting in anticipation of that recession. Importantly, they are acting in this way regardless of OPEC+ actions aimed at curbing supply in a way that should return the market to balance.
Some analysts said it last year, using the age-old adage that the cure for high oil prices was high oil prices. This time, the cure was a slowdown or outright recession. Many wondered if the cure wasn't going to be worse than the disease. It now appears we might get a chance to see if this is the case.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
There is one unvarnished truth about the decline in oil prices over the last three months and it has nothing whatsoever to do with the fundaments of the global oil market or a so-called slowdown in China’s manufacturing sector and everything to do with persistent fears of a global banking or financial crisis reminiscent of the 2008 subprime financial crisis triggered by a shaky US banking system.
How could a projected growth of 5.2%-6.5% by China in 2023 compared with 1.3% for the United States and 0.8% for the EU and record crude imports of almost 13.0 million barrels a day (mbd) in April disappoint global oil demand? Moreover, China will account for 1.15 million barrels a day (mbd) or 50of OPEC+’s projected 2.3 mbd global demand growth in 2023.
Only when fears of a global banking crisis disappear altogether from the market will prices recoup their losses and resume their surge towards $90-$100 a barrel for Brent crude this year.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert