Recession fears have left oil prices lingering at a one-year-low with slim trades ahead of the holidays, but the upside momentum for oil prices next year may have already started.
Hedge funds and other money managers have slowed the sell-off in the two most important crude futures contracts following an exodus in November.
In the week to December 13, money managers also cut their combined bullish Brent and WTI bets to the lowest level since April 2020, according to estimates by Saxo Bank’s Head of Commodity Strategy Ole Hansen, based on the weekly Commitment of Traders report from exchanges.
However, portfolio managers slightly raised their net long position—the difference between bullish and bearish bets—in the U.S. benchmark, WTI Crude, in the latest reporting week. This was the first time in more than a month that hedge funds actually added more longs than shorts in one week in one of the most traded petroleum contracts.
But Brent Crude saw the net long position drop last week to the lowest in 26 months.
“For a second week the COT report showed a divergence between WTI where 4.4k lots were net bought and Brent suffered a 5.6k lot reduction in the net long to 89.4k lots, a 26-month low,” Saxo Bank’s Hansen noted.
The longs-to-shorts ratio in Brent Crude has dipped to just 2:1, according to the bank’s estimates, suggesting there could be an upside for renewed bullish positioning at much lower entry-point price levels than in most of the past year.
While the near-term outlook and sentiment are still tilted to the downside with money-tightening policies and a Covid surge in China after restrictions were eased, the outlook for later next year is more bullish than just a few weeks ago.
“Crude oil prices continue to find it challenging to balance the varied narrative around the demand outlook. China demand faces short-term headwinds as the Covid wave spreads but is likely poised for a rebound in the medium term as authorities remain committed to driving up consumption recovery,” Saxo Bank’s strategy team said on Tuesday.
The U.S. announcing the start of crude repurchasing for refilling the Strategic Petroleum Reserve (SPR) also puts a firm floor under oil prices at $70.
“The oil market has tremendous support at the $70 level as the US will likely be refilling the Strategic Petroleum Reserve for a while,” Ed Moya, Senior Market Analyst, The Americas, at OANDA, said on Tuesday.
Commenting on the still uncertain outlook for Chinese demand, Moya noted that “It is hard to believe that if the COVID situation deteriorates much worse than feared that Beijing might have to deliver a U-turn over its policy.”
Traders and money managers haven’t flocked back to oil after the Chinese reopening, signaling that the market is aware that the Covid situation will get worse before it gets better, and there won’t be a surge in Chinese demand for at least a few months. However, the authorities say that they will support the economy and consumption through the Covid wave.
Then there is the Russian oil embargo and the price cap on Russia’s crude, which are set to disrupt and tighten the market early next year.
While Russian oil supply has held so far better than expected, “The ability of India and China to absorb a still more significant amount of Russian oil is likely limited,” ING strategists said in a 2023 outlook this week.
As a result, ING sees Russian supply falling by between 1.6 million bpd and 1.8 million bpd annually in the first quarter of 2023.
“We expect a growing deficit over the course of the year, which suggests that oil prices should trade higher from current levels. We currently forecast ICE Brent to average US$104/bbl over 2023, but the uncertainty around our forecast is high given the geopolitical situation and the direction of the global economy,” ING said.
The International Energy Agency (IEA) doesn’t rule out another oil price rally once the market feels the full effect of all embargoes on Russian crude and products at some point after February next year.
“As we move through the winter months and towards a tighter oil balance in 2Q23, another price rally cannot be ruled out,” the IEA said in its Oil Market Report for December.
By Tsvetana Paraskova for Oilprice.com
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