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Alex Kimani

Alex Kimani

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

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Oil Markets Are Bearish But Downside Is Limited

  • Oil prices fell to their lowest level this year on Wednesday morning, a clear sign of bearish sentiment in the oil market despite the recent price cap.
  • Despite bearish sentiment, Standard Chartered says that the downside to oil is limited as fundamentals are supportive and there are no major bearish catalysts looming.
  • Regarding the oil price cap, Standard Chartered has predicted that it will have little effect on oil prices as the main importers of Russian oil are not taking part.

WTI and Brent crude oil prices fell for a third straight session on Tuesday, with the U.S. benchmark now at its lowest level in a year. Front-month Nymex crude for January delivery closed the day -3.5% to $74.25/bbl, its lowest in nearly a year, while February Brent crude finished -4% to $79.35/bbl, its weakest close since January 3. It’s now clear that the broader market selloff and worries about more aggressive monetary tightening by the Federal Reserve have overshadowed any positive effect from the new price cap on Russian oil sales. 

Oil traders have been anxiously waiting to see how the price cap on Russian oil will affect the market, but the measure is yet to impact prices. 

Meanwhile, data released on Monday showed the U.S. ISM service sector index climbed slightly to 56.5% in November from 54.4% in October, which "triggered red flashing signals the Federal Reserve may keep interest rates higher for longer, increasing the odds of a U.S. recession and less energy use,’’ Stephen Innes, managing partner at SPI Asset Management, has told Morningstar. The ISM surveys non-manufacturing (or services) firms' purchasing and supply executives. The services report measures business activity for the overall economy; above 50 indicates growth, while below 50 indicates contraction.

Bearish Oil Price Sentiment

So, just how bearish has sentiment become in the oil markets? 

According to commodity analysts at Standard Chartered, speculative positioning in crude oil has been unremarkable through most of 2022, but has changed in recent weeks. The analysts have revealed that their proprietary crude oil money-manager positioning index that compares net longs across the four main New York and London-based crude contracts relative to open interest and historical norms is currently more negative than those for all other commodities they track. StanChart says that In recent months, crude oil has remained close to the bottom of the ranking of metals and energy in terms of implied positive speculative preference, while gasoline has been close to the top.

StanChart’s crude oil index currently stands at -70.3, the lowest since mid-April

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2020 (about a week before WTI prices settled at a negative price). The index has now fallen

by 57.4 over the past three weeks marking the largest three-week fall since February

2020, just before the temporary collapse of the OPEC+ agreement.

Oil positioning

Source: Standard Chartered

However, StanChart says the situation this time around is very different from what it was during the historic oil price collapse of 2020, which is likely to limit the downside on oil prices. For one, the analysts note that oil market fundamentals are far more supportive this time than they were in early 2020; demand is not about to collapse due to a pandemic and no price wars by producers are present at the moment. 

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The experts say that oil prices are caught in the backwash from top-down macro trades with both positive and negative news on the economic front triggering selloffs. 

According to StanChart, negative U.S. economic data points are triggering an oil price selloff due to recessionary fears; however, positive data points are, ironically, having a similar effect due to the strengthening of the U.S. dollar. 

Further, sentiment had been buoyed by hopes of China reopening, but as timescales dragged many traders have preferred to bet more in the metals markets instead. 

Luckily for the oil bulls, the commodity experts say the new shorts are relatively weak and will soon be covered, helping to shore up oil, though in the short-term the market is likely to accentuate the negative.

Regarding the price cap on Russian sea-borne oil, StanChart has predicted that it will have little effect on oil prices. The analysts note that China, India, and Turkey are the three key swing

consumers of Russian oil and none has yet suggested that they would consider signing up to the cap. Without the participation of those three countries, the amount of Russian oil likely to move subject to the cap would likely be small even if Russia agreed to sell oil under those terms (which it has repeatedly said it will not). 

The big question here in terms of market impact is then whether Russia can transport oil to its major consumers (including providing adequate insurance) without using EU or other G7 services. StanChart says that Russia has acquired a large enough ‘shadow’ tanker fleet since its invasion of Ukraine that it can use to move most of the displaced volumes; however, the analysts note that the insurance aspect is likely to cause significant issues. This has led analysts to predict that Russian crude output is likely to fall by 1.44 million barrels per day in 2023 thanks to a progressive shortage of high-quality equipment and a lack of access to international service companies as time goes by.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on December 08 2022 said:
    I continue to maintain the view that a price cap on Russian oil exports is neither viable nor enforceable. Neither Russia or OPEC+ nor the global oil market will accept it. It will create confusion in the global oil market and will end up causing shortages in the markets and further price hikes.

    Moreover, the fundamentals of the global oil market haven’t changed. They are as strong as before the cap was introduced. The recent decline in oil prices is due to uncertainty until the market digests the impact of the cap.

    Furthermore, the market is also awaiting the reactions of both Russia and OPEC+.. Russia has made it clear that it will never accept the price cap and would halt its exports to countries implementing it.

    OPEC+, on the other hand, may have to wait a bit longer to assess implications of the cap but it will reject the cap. OPEC+ considers that the price cap is harmful to the interests of its members the overwhelming majority of whom need a Brent crude price of $100 a barrel or higher to balance their budgets.

    In the final analysis, the price cap will have no effect on Russian oil exports or prices since Russia has a large fleet of tankers capable of carrying its exports to the four corners of the globe. If needed, it can also avail itself to oil tankers from China, India, Turkey and scores of other countries. Moreover, Russia neither need Western shipping nor Western insurance for its oil cargoes since buyers of its oil can provide insurance for their cargoes.

    However, the most important bullish factor is that customers of Russian oil like China, India, Turkey and Asian oil traders have declared that they have no interest in the price cap and that they will continue to buy Russian crude as usual.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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