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Will We See $100 Oil In October?

After rallying to more than $97 per barrel on Wednesday, Brent crude took a breather on Thursday as traders started to take profits and the macro-focus in the markets turned to rising interest rates.

The bulls can thank a sustained fundamental tightening for helping offset concerns about a higher-for-longer rates cycle. Last week, the U.S. central bank left interest rates unchanged but bolstered its hawkish stance with a further rate increase projected by the end of the year. Higher interest rates have historically been bearish for oil prices because they usually translate to less demand for oil as activity declines with higher costs. Interestingly, commodity analysts at Standard Chartered have suggested that a hawkish Fed could turn out to be a blessing in disguise this time around since it's likely to cause OPEC producers to be more cautious for longer. 

Meanwhile, the U.S. dollar has strengthened considerably over the past three months after the U.S. economy proved more resilient than expected thus fuelling appetite for American financial assets.

StanChart has predicted a further 1.3 million barrels per day (mb/d) fall in global crude inventories in Q4, following 2.1mb/d of draws in Q3. The analysts have noted that while slow to join the rally, speculative funds have now moved to the long side of the oil futures market. StanChart's proprietary crude oil money-manager positioning index is now at a 44-month high of +16.7.

Source: Investing.com

Even better for the bulls: the oil price rally still has legs to run. 

StanChart has launched SCORPIO (Standard Chartered Oil Research Price Indicator), a machine learning model for oil price forecasting. SCORPIO is a proprietary tree-based model designed to generate a forecast for Brent crude spot prices on a one-week timeframe using parameters such as U.S. fundamental data, positioning data, physical global oil stocks, refinery margins/product pricing, financial indicators, technical indicators and non-oil-specific indicators. Related: U.S. Says Chinese Minerals Control Will Make Energy Security More Complex

Figure 2 shows the aggregated importance of these features over time.

Source: Standard Chartered Research

The analysts have tested this tool and found that it significantly improves on all of the metrics achieved by the baseline model which is a random walk forecast (i.e., the price change for the next week will be the same as the previous week).

Source: Standard Chartered Research

SCORPIO has forecast a w/w price increase of USD 2.1/bbl for front-month Brent to

settlement on 2 October. StanChart says the upward forecast would have been greater were it not for speculative positioning with the money-manager positioning index sewn as a pivot point indicator. SCORPIO also sees USD strength as weighing on the oil price rally.

StanChart is not the only bull here. J. P. Morgan says it will stick to its strategy of "staying defensive and trimming portfolio duration." JPM rates the Energy sector overweight despite a stronger dollar, a hawkish Fed and geopolitical developments and believes that the Fed will hold higher rates through Q3 2024.

"In the current environment, the assumption is that having additional immaculate disinflation would allow rate cutting without having to have growth risk be the driver for the disinversion of the yield curve,'' J.P. Morgan economists said in the report.

Overall, Wall Street remains bullish on the energy sector despite oil stocks lagging oil prices FactSet has reported that overall, Wall Street has 11,062 ratings on stocks in the S&P 500, of which 54.4% are Buy ratings, 40.0% are Hold ratings, and 5.6% are Sell ratings. Interestingly, at the sector level, the Energy (64%) sector has the highest percentage of Buy ratings, while the Consumer Staples (45%) sector has the lowest percentage of Buy ratings.

The majority of analysts expect oil prices to remain high or go even higher

"The energy stocks will obviously beat because of higher energy costs right now. The world cannot have a disruption in energy right now because the supply-demand imbalance in the world is very fragile," Louis Navellier, chief investment officer at Navellier & Associates Inc., has said in a note. 

As long as Saudi Arabia and OPEC+ maintain production discipline and markets remain tight, oil prices might remain unfazed by a brawny dollar or a hawkish fed.

By Alex Kimani for Oilprice.com

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Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com.  More