The collapse of Silicon Valley Bank in March triggered massive capital flight from oil to precious metals as panic spread that this could be the early innings of yet another banking and financial crisis.
According to commodity analysts at Standard Chartered, the SVB collapse led to the fastest-ever move to the short side in oil markets, with speculative short volumes more than six times larger than those after the collapse of Lehman Brothers and Bear Stearns in 2008. Money-manager positions across the four main Brent and WTI futures contracts became shorter by a record 228.9 million barrels (mb) in the space of just two weeks.
Predictably, oil prices cratered to multi-year lows in a matter of days before mounting a half-hearted rally thanks to the 2nd of April decision of some OPEC+ members to make voluntary output cuts.
Unfortunately for the bulls, the shorts have now returned with a vengeance.
According to StanChart, money-manager positions across the four main Brent and WTI futures contracts became shorter by 184.6mb over the past two weeks, a pace only exceeded by the increase in speculative shorts after the SVB collapse, and at the start of the pandemic.
At this point, it’s not clear whether these sharp swings in the same direction are due to an over-reliance on similar algorithms by traders. And, just like us, StanChart says the excessive bearishness is overdone relative to underlying news flow and fundamental data.
Too Bearish
As we have pointed out before, it’s hard to find a proper justification for the growing bearishness in the oil markets. After a brief rally on Monday, oil prices have reversed course on Tuesday’s session despite oil markets still being in oversold territory. According to Standard Chartered, the bank’s proprietary U.S. oil data bull-bear index has been bullish for eight straight weeks with crude oil elements of the data the strongest thanks to inventories falling relative to the five-year average for the ninth time in 10 weeks.
The energy markets remain surprisingly resilient with oil inventories declining and demand in the pivotal Chinese market growing as domestic travel rebounds.
According to the International Energy Agency, global oil consumption remains on track to rise by 2M bbl/day this year to an all-time high 101.9M bbl/day. Inventories are gradually tightening and should deplete further as OPEC+ implements new production cuts. Crude oil inventories have fallen below the five-year average for the first time this year. Last week, implied gasoline demand rose by 992 thousand barrels per day (kb/d) w/w to a 15-month high of 9.511mb/d.
StanChart has predicted that the OPEC+ cuts will eventually eliminate the surplus that had built up in the global oil markets over the past couple of months. According to the analysts, a large oil surplus started building in late 2022 and spilled over into the first quarter of the current year. The analysts estimate that current oil inventories are 200 million barrels higher than at the start of 2022 and a good 268 million barrels higher than the June 2022 minimum.
However, they are now optimistic that the build over the past two quarters will be gone by November if cuts are maintained all year. In a slightly less bullish scenario, the same will be achieved by the end of the year if the current cuts are reversed around October. This should shore up prices.
Meanwhile, natural gas prices are expected to increase in the latter half of the year as Europe goes on yet another buying spree. Europe has failed to secure enough long-term LNG contracts to offset cut-off Russian gas imports, with Reuters predicting this may prove costly next winter and could sharply tighten the market. The European Union views natural gas as a bridge fuel in the transition to renewable energy, and buyers generally struggle to commit to long-term contracts. This means that Europe might be forced to buy more from the spot markets as it did in 2022, which in turn is likely to push prices up:
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"Since the green lobby in Europe has managed to persuade politicians wrongly that hydrogen to a large extent can replace natural gas as an energy carrier by 2030, Europe has become far too reliant on spot and short term purchases of LNG," consultant Morten Frisch has told Reuters.
By Alex Kimani for Oilprice.com
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