The past few weeks have been a disaster for oil bulls after energy stocks posted their worst performance since the start of the pandemic amid fears that interest rate hikes across the globe could slow global demand. Last week, West Texas Intermediate(WTI) crude oil futures fell below $102 a barrel, good for a 22% drop over the past two weeks--the technical definition of a bear market. The funny thing is that this doesn't feel like a bear market, considering that crude is still up about 40% this year. Some oil bulls are not convinced that the epic bull run is over, either, with Goldman Sachs expecting oil prices to top out at $140 per barrel.
At the beginning of this week, spare capacity concerns have sparked a comeback in crude, with WTI trading above $113 on Wednesday morning.
However, at this juncture, the bears continue to claim that the market isn’t as tight as many analysts believe.
Last week, investors sold oil futures at the fastest rate since just after Russia's invasion of Ukraine, with a deteriorating economic outlook largely to blame.
According to Reuters, money managers and hedge funds sold the equivalent of 71 million barrels in the six most important petroleum futures and options contracts in the week to June 21. Based on ICE Futures data by the U.S. Commodity Futures Trading Commission, that marks the fastest-selling clip since the week ending March 8, shortly after Russia invaded Ukraine.
Sales over the last two weeks clocked in at 82 million barrels, effectively reversing purchases of 99 million over the previous four weeks. NYMEX and ICE WTI (-35 million barrels) and Brent (-30 million) were the most heavily sold, with small sales in U.S. diesel (-4 million) and U.S. gasoline (-3 million). Only European gas oil (+1 million) recorded purchases.
In effect, existing bullish long positions were cut by 65 million barrels while 6 million barrels of new bearish shorts were initiated; the net position across all six contracts was cut to just 564 million barrels, down from 647 million barrels, while the ratio of long to short positions fell to 5.68:1 (74th percentile) from 6.68:1 (84th percentile) just a fortnight earlier, implying rampant profit-taking among formerly bullish fund managers.
But it's not just the futures market portending increasing bearish sentiment in the oil markets. The physical crude markets could be offering tell-tale signs that the bull run could be on its last legs.
Citibank's Ed Morse has released his latest bearish oil report Tuesday, forecasting $75 Brent in 2023 and ~$50 Brent oil prices thereafter.
According to the analyst, the oil market is "looser" than OECD inventories indicate, a clear negative cue for oil prices. Morse says he expects inventory builds in China during Q2 and more than 2mb/d of inventory builds during the final quarter of the year. He then sees Iran ramping production volumes in Q1 2023, while U.S. producers are projected to accelerate growth and grow liquids production a full 1.8mb/d.
Further, Morse says Russian production will not fall nearly as much as the oil bulls have been hoping, and expects Russian production to fall 1.0-1.5mb/d by year end, below the 2.0-3.0mb/d that some analysts have projected.
Source: Seeking Alpha
That said, the bulls can take small comfort in the fact that Morse is something of an oil permabear, and started calling for oil prices to fall by 50% back in March at the height of the oil price rally.
He has, however, been consistent in supporting the bear call, with increased U.S. shale production and more oil from Iran being his main counterpoints. It's also worth noting that current oil prices are much closer to Morse's $75 per barrel target than Rystad Energy's $240 per barrel, which the Norwegian punter had projected for the current summer.
By Alex Kimani for Oilprice.com
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