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Oil Prices Stabilize As Bullish And Bearish Catalysts Clash

  • Oil posted its largest loss in nearly 2 years last week.
  • Possibility of new sanctions on Russian energy creates upward risk. 
  • COVID lockdowns in China and concerted SPR releases create downward risk.

Last week, Crude oil prices posted their biggest one-week loss in nearly two years thanks to an apparent breakthrough in peace talks between Russia and Ukraine. Front-month U.S. WTI crude (CL1:COM) plunged 12.8% to $99.27/bbl and while Brent (CO1:COM) fell 11.1% to $104.39/bbl, the biggest weekly percentage declines for both benchmarks since late April 2020.

There was no shortage of bearish news for the oil markets.

Previously, European countries walked back threats of sanctioning Russian oil after Russia promised to scale down military operations in the north of Ukraine. The promise sparked hope that the war in Ukraine may finally begin to de-escalate. 

Russia could, however, still be in line for fresh sanctions: the flow of "bloody money" to Russia must stop, Kyiv's mayor has said as the West prepares new sanctions on Moscow after dead civilians were found lining the streets of a Ukrainian town seized from Russian invaders. Since Russian forces withdrew from northern Ukraine, turning their assault on the south and east, grim images from the town of Bucha near Kyiv, including a mass grave and bound bodies of people shot at close range, have prompted international outrage.

Upside risks from the disruption of Russian exports have been met by downside risks from recession and China's coronavirus outbreaks.

Markets reacted negatively after Shanghai extended lockdowns to the entire city. The lockdowns have been imposed indefinitely amid growing public anger over quarantine rules after city-wide testing saw new COVID-19 cases surge to more than 13,000. China’s zero-COVID strategy is likely to lead to even more lockdowns that are likely to significantly lower oil demand for the Asian giant. China is the world’s biggest importer of crude, and falling demand might help ease market tightness.

Related: Venezuela’s Oil Industry Is Causing An Environmental Catastrophe
Meanwhile, the oil price bull run has hit the skids after President Biden said on Thursday that the U.S. would release 180M barrels from the Strategic Petroleum Reserve over the next six months in the largest release in SPR history, while threatening to impose penalties on domestic drillers for failing to use federal oil permits.

The SPR move "may halt oil prices from skyrocketing to $150-plus, and in the short term will weigh on prices. However with war still in course and Putin demanding to be paid in rubles... it's not going to crush the price of oil," Spartan's Peter Cardillo has told the Wall Street Journal.

International Energy Agency "IEA" member states are also making plans to release their own strategic oil reserves. During a press conference last Thursday, President Biden said he expected allies to release 30-50mb, in addition to the U.S. release.

Hedge Funds Dumping Oil

With all these negative catalysts, it’s hardly surprising that the oil-buying mood has dampened somewhat.

According to Reuters, hedge funds and other money managers sold the equivalent of 15 million barrels in the six most important petroleum futures and options contracts in the week to March 29,  including the liquidation of 10 million barrels of previous bullish long positions and the initiation of 6 million barrels of new bearish short positions.

That marked a sharp reversal from purchases of 16 million barrels the previous week--and could have been worse since the report came before the SPR announcement by the Biden administration.

Related: Baghdad’s Bold Move To Take Over Kurdistan’s Oil Sector Is A Blow To Russia

Oil fund money flows are also suggesting that the sector could be overbought.

After pulling in $1.75B over the past year,  the Energy Select Sector SPDR Fund (NYSEARCA:XLE) has recorded $1.46B in outflows in the month of March as Russia's war on Ukraine shines a spotlight on energy security and also signifies a potential top for oil and gas stocks as market players take profits. In contrast, renewable energy funds have recorded $642 million in inflows in the month of March, breaking a 3-month losing streak that saw $1.9B in outflows. Higher and volatile oil and gas prices have been making the case for renewables more attractive.

That said, funds remain significantly more bullish about the outlook for refined fuels and middle distillates rather than crude, reflecting the low level of diesel and gas oil inventories around the world. Even in distillates, however, bullishness is stemming from low inventories and the impact of the conflict on Russia's exports was tempered by concerns about economic slowdowns evident in the United States, Europe, China and the rest of Asia.

By Alex Kimani for Oilprice.com

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  • Varney Gossleton on April 06 2022 said:
    It found its true value and settled out at 107. Nothing to see here.

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