Investors are becoming increasingly bullish on crude oil, with trading activity on the most popular crude and fuels contracts off to a strong start of the year.
Reuters’s John Kemp reported yesterday that hedge funds had increased their purchases of crude oil and fuels by the equivalent of 51 million barrels in the week to January 12. This, Kemp noted, was the biggest weekly buying spree for the past seven weeks, bringing the total to 540 million barrels of oil equivalent since mid-November.
Bloomberg also notes a sharp uptick in buying on the oil futures market as the outlook on the commodity brightened, and banks started revising their price forecasts for this year upwards.
“People are reconsidering the investment case for the commodities asset class,” Bloomberg quoted Harry Tchilinguirian, oil strategist at BNP Paribas, as saying. “Open interest in oil is rising again as macro-oriented funds look at the case for commodities.”
There is also considerable hedging activity, the Bloomberg report noted. West Texas Intermediate has been rising as strongly as Brent crude, with 2022 futures close to hitting $50 a barrel—a level at which a “big chunk” of U.S. shale oil is profitable, according to the head of the International Energy Agency, Fatih Birol.
As a result, embattled shale drillers are hedging their future production at these higher prices thanks to the rollout of Covid-19 vaccines and continued OPEC+ cuts with an additional gift of a 1-million-bpd cut in Saudi production.
Some have started to wonder if shale producers would be able to resist the siren call of production growth. In the meantime, sentiment among traders has almost recovered to pre-pandemic levels. Kemp reports the ratio of long to short positions in the week to January 13 stood at more than 5:1, which compared to below 2:1 in November.
A year ago, the Reuters analyst noted, the long:short position ratio stood at between 6:1 and 7:1.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- Saudi Output Cut Boosts Demand For Russia’s Urals Crude
- UAE Oil Major Turns To Hydrogen
- U.S. Shale Is Gaining Influence Over Oil Markets
An added bullish factor is China’s and India’s insatiable thirst for oil. China’s crude oil imports broke all previous records and were 10% higher in 2020 than 2019 despite the pandemic. China’s economic growth is projected to hit 8% this year according to the International Monetary Fund (IMF). That is why China’s crude oil imports will continue to break records in 2021.
India has managed to restore its oil demand to 2019 level in September 2020 despite the impact of the pandemic. The IMF is projecting that India’s economy will grow at 8.3% in 2021 with its crude oil imports also breaking previous records.
Based on the above, Brent crude price could hit $60 a barrel in the first quarter of 2021 rising to $70-$80 in the third quarter and averaging $60-$65 in 2021. Moreover, global oil demand could return to pre-crisis levels of 101 million barrels a day (mbd) by mid-2021
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London