Oil Traders Turn Bears Fast and Furiously

• Even though Chinese oil demand broke records in the course of the year, at least based on crude imports, traders remained unconvinced that the pace of growth would remain unchanged.
• One of the reasons oil prices moved lower in the third quarter was lower Chinese crude imports.
• Kemp: traders were underwhelmed by the OPEC+ cuts.

Just a few months ago, oil prices were on the rise, talk on Analyst Street was about a deficit to manifest itself by the end of the year, and, as a result, even higher prices.

Four months later, oil is depressed, and traders continue selling, worried about a looming glut, which OPEC+ is not doing enough to reduce. And that after the cartel announced cuts of 2.2 million barrels daily. It is an unusual situation, to say the least.

It started with Chinese demand early in the year. Oil bulls watched China like hawks as the country emerged from the last pandemic lockdowns and the economy returned to business as usual. Also as usual, however, analysts had perhaps too high expectations about oil demand. And when these did not materialize, traders sold oil, and prices fell.

Even though Chinese oil demand broke the record in the course of the year, at least based on crude imports, traders remained unconvinced that the pace of growth would remain unchanged. This was in fact, quite astute, since no country can maintain the same level of oil demand, and especially not a country that issues oil import and fuel export quotas.

Indeed, one of the reasons oil prices moved lower in the third quarter were lower Chinese crude imports. These, in turn, were the result of refiners running out of quotas. Traders, however, took it to mean that overall demand is weakening and it’s time to get out.

Meanwhile, in the United States, drillers were getting more oil out of the ground without really trying. This led to a record-breaking output of 13.2 million barrels daily, per the Energy Information Administration. Related: Saudi Aramco Enters Pakistan in Downstream Expansion Drive

The news of the record-breaking output further fueled fears of oversupply just months after the market was dominated by equal fears of an oil deficit that led commodity analysts to predict prices of $100 per barrel of Brent by the end of the year.

Even the reignition of the Israel-Palestine war could not support prices for longer. Traditionally, any disruption in the Middle East lends upside potential to prices, but this time, the effect was unusually short-lived. A recent escalation from Yemen’s Houthis, who said they would target any vessel sailing to Israel, has injected some life into benchmarks but a rather weak one.

So, traders are selling. In fact, they have been selling so much that positions have declined to just 295 million barrels as of December 5, per Reuters’ John Kemp. Such a low level of oil positions has been rare, to say the least, over the past ten years. And it has been a sharp drop: on September 19, oil positions stood at 680 million barrels.

Kemp suggests that traders were underwhelmed by the OPEC+ cuts. They apparently expected even deeper cuts. Or perhaps there was simply so much talk about the cuts that traders got used to the thought of these cuts and when the news about record U.S. production broke, it was enough to offset the official OPEC+ announcement.

It is an interesting development because even in November, some analysts were being upbeat on oil. JP Morgan, for instance, published a forecast arguing that oil was about to enter a supercycle and prices could move above $100 per barrel. “Supply sources outside of OPEC are reaching their limits, leaving the alliance to meet rising demand and deplete its spare capacity,” the bank’s analysts wrote.

Instead, we’ve seen OPEC announce additional production cuts and traders scatter because U.S. oil production hit 13.2 million—and is about to hit 13.3 million bpd, which no one apparently thought to interpret as a major drop in output growth. That’s because traders don’t seem to be interested in fundamentals such as the one mentioned by JP Morgan and other forecasters. And that means the oil market will most likely continue to be unusually unpredictable.

By Irina Slav for Oilprice.com

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