Fundamentals and geopolitics pushed oil prices to above $90 per barrel last week as more market participants have become bullish on crude.
After sitting on the sidelines in a more risk-off approach for nearly a year, a growing number of financial market participants now believe that oil is a buy, according to Mike Muller, Head of Asia at the world's largest independent oil trader, Vitol.
As Brent oil prices broke above $85 and then $90 per barrel earlier this month, some short-sellers decided to exit their positions, while the fundamentals with current supply issues and expected strong demand, especially in the second half of the year, are driving an increase in the long positions in oil.
"We have a market that is not necessarily tight in the prompt, but given most people's projections for later in the year, most people, most consultants, most experts, most advisers are calling for stock draws later in the year, and that's giving a firm underpinning to the fundamental picture," Vitol's Muller said on Gulf Intelligence's Daily Energy Markets podcast on Sunday.
"Fundamental physical changes in the oil markets have taken a second-tier back seat to the money flows, and financial markets have convinced themselves this one is a buy," Muller added.
Historically, market participation is still low, but there is a realization that energy commodities "correlate extremely well with inflation," and if there is renewed concern about inflation, oil is a hedge that people seem to want, he added.
Moreover, the traders that traded the $70-$85 per barrel range – buying oil in the low $70s and selling in the high $80s, have decided to exit with the new range now breaking out, according to Muller.
Hedge funds and other money managers boosted their net long position – the difference between bullish and bearish bets – in crude oil futures and options in the week to April 2, data from exchanges showed. The combined net long in Brent and WTI, the most traded contracts, jumped to a six-month high, while the net long position in Brent Crude surged to the highest level in two and a half years, according to the data compiled by Saxo Bank.
Oil may have room to run up to $100 a barrel, especially if OPEC+ sticks to its guns and rolls over the cuts further into the second half of the year when demand is expected to be very strong.
Vitol, for example, expects refined product demand globally to be "a lot, lot higher" in the second half, at around 2 million barrels per day (bpd) than in the same period last year, Muller told the Gulf Intelligence podcast.
"We're not in any way petering out toward peak oil here," Muller noted.
"We're at one of the fastest year-on-year growth rates we've ever seen in the last 20 years of history."
OPEC+ and Saudi Arabia could, of course, change the picture with supply and become tempted to use some of their spare capacity, especially if prices remain strong, analysts say.
Oil above $90 a barrel could start eroding demand, although there are no signs of this yet.
In addition, there is one geopolitical aspect of the OPEC+ cuts that shouldn't be discarded lightly.
"We should never forget that Russia and Saudi Arabia have it in their hands to not only relax the market but to bring US gasoline prices up before the election," Christof Rühl, Senior Research Scholar at the Center on Global Energy Policy at Columbia University, said on the same Gulf Intelligence podcast.
"Now I'm not a conspiracy theorist at all, but in this instance, I think the desire at least on Russia's part to see Donald Trump win the election must be an overwhelming incentive," Rühl added.
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$100 oil could also be in sight, experts say.
The market is currently "on firm fundamental footing," Bob McNally, founder of consultancy Rapidan Energy and a former White House adviser, told Bloomberg Television in an interview last week.
"I think $100 oil is entirely real — it just requires a little more risk pricing on the true geopolitical risk."
By Tsvetana Paraskova for Oilprice.com
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Bullish sentiments in the market don't grow in a vacuum. They are underpinned by solid fundamentals, robust demand, a tightening market, Chinese crude imports breaking records and surging by 9% in the first quarter of 2024 over the same period in 2023 and a Chinese economy projected to grow this year by 5%.
Against such fundamentals , manipulations of the global oil market by the United States, the IEA, speculators and oil traders aimed at depressing oil prices stand no chance.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert