After a major decline that saw oil prices fall to multi-year lows, oil markets appear to have bottomed out and begun an encouraging ascent higher. Over the past two weeks, a general bearish and risk-off sentiment cut across asset markets and triggered a lengthy unwind of speculative positions in oil futures. A top commodity analyst blamed the unusually steep decline to significant selling by banks in response to gamma-effects as prices closed in a concentration of producer puts around USD 75/bbl for Brent and USD 70/bbl for WTI crude. Luckily for the bulls, in the current week, oil prices have staged a remarkable turnaround, with Brent climbing from a two-year low around $70 per barrel on Monday to USD 77.20 per barrel on Thurday’s intraday session while WTI has recovered from around $63 per barrel to $71.20 over the timeframe. That’s a nearly 10% rally in the space of just three days.
And now commodity experts at Standard Chartered are saying that the path of least resistance for oil prices at this point is higher, not lower. Previously, the analysts had said that the unwinding of speculative length appears to be complete at this juncture, thus lowering selling pressure, but had warned that prices might retest the lows if the FOMC hikes its policy rate by more than the widely expected margin of 25bps.
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Thankfully, the markets have successfully scaled that wall of worry after the Fed’s hike on Wednesday came in-line with expectations. The Fed also indicated that the current rate hike cycle is nearing an end.
Fast Recovery
It gets better for the bulls: StanChart expects last week’s gamma effects to reverse course with banks buying back positions thus reinforcing the short-term rebound. Beyond that, StanChart says oil prices will largely be dictated by OPEC’s and consuming countries’ strategic inventory policy shifts.
Specifically, the experts have predicted the current surplus will persist till early Q2; however, they expect the rest of the year to be in a modest deficit.
Source: Standard Chartered Research
StanChart is not the only oil bull here.
Goldman Sachs' Jeffrey Currie has acknowledged that the unexpected banking crisis has soured the macroeconomic outlook significantly and weighed heavily on oil prices, calling the situation a "big, scarring event." Still, the analyst expects prices to rally from here, and has only lowered his 2023 end-of-year target from $100 to $94 a barrel.
According to Currie, fundamentals in the oil markets remain largely unchanged thus supporting the previous bull case. He has pointed out that key physical indicators, such as refining margins and time spreads, have remained stable, a positive sign that in-use demand remains strong and is likely to continue driving the physical market higher. Currie has also argued that the banking crisis will only have short-lived effects but very limited impact over the long-term, "I think the key message here is fundamentally we haven't seen a big significant shift," he said. "Physical markets are going to have to drive this market higher."
However, he has warned that the turmoil will result in a "... a longer path forward."
Hedge fund manager Pierre Andurand of Andurand Capital is not a mere bull but an ultra-bull: Andurand has predicted that crude will hit $140/bbl by the end of the year. Just like Currie, Andrurand argues that the recent oil price crash due to banking jitters was purely speculative. Further, he expects crude oil demand to peak around 2030, but "even when we peak, oil demand won't fall down so fast. We will reach peak demand towards 110M bbl/day and then a slow decline from there."
Oil and gas stocks have also been surging higher in tandem with the commodities they track: the energy sector’s benchmark, the Energy Select Sector SPDR Fund (NYSEARCA:XLE), is up 4.1% since the beginning of the week.
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After posting record profits for two straight years amid high oil and gas prices, earnings for the energy sector are only expected to decline modestly in the current year compared to other market sectors. Late last year, a Moody's research report projected that industry earnings will stabilize overall in 2023, though they will come in slightly below levels reached by recent peaks. The analysts note that commodity prices have declined from very high levels earlier in 2022, but have predicted that prices are likely to remain cyclically strong through 2023. This, combined with modest growth in volumes, will support strong cash flow generation for oil and gas producers. Moody’s estimates that the U.S. energy sector’s EBITDA for 2023 will clock in at $585, good for a modest 6% decline from 2022 levels.
Valuations in the oil and gas sector also remain low despite two years of strong rallies with many energy and gas stocks trading at large discounts to the market.
By Alex Kimani for Oilprice.com
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We only need a common sense approach but then investment banks, analysts and experts won’t get handsome fees for their pontifications without verbosity and using fancy terms to justify their fees.
A common sense approach tells us that prices have no alternative but to rise this year and the years after based on a continued robust oil demand underpinned by China’s economic rebound and abetted by a shrinking global spare oil production capacity including OPEC+’s.
The Bullish China factor is far more powerful than all the other bearish factors such as concerns about recession, Federal Reserve hiking of interest rates and delays in refilling of the SPR combined with the exception of a global banking collapse or another financial crisis like the 2008 subprime one.
There are, however, indications that fears of a banking collapse or a financial crisis are subsiding and that is why oil prices will resume their surge.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert