Following a 10% slump in two weeks, oil prices jumped by 5% on Monday as concerns about the banking sector eased and 400,000 bpd of crude exports from Kurdistan were shut in.
The move lower in oil prices this month was driven by broader market jitters amid a liquidity scare in the banking sector, which saw two U.S. banks fold and Swiss giant Credit Suisse taken over by domestic rival UBS. Speculative liquidation of long positions in oil also contributed to the plunge in oil futures prices.
Going forward, the health of the global banking sector and the economy, as well as the Fed’s interest rate policy, will determine if $70 a barrel Brent was the lowest price for the international benchmark this year, or if oil has a shot at $100 per barrel if the Chinese reopening surprises to the upside.
The collapse of Silicon Valley Bank more than two weeks ago triggered massive selloffs. The oil market was an early victim of the sharp decline as investors fled riskier assets and speculators rushed to close bets on rising oil prices to avoid exposure in case of a global banking crisis and another recession.
Buyers of crude oil futures held a large net long position – the difference between bullish and bearish bets – before the SVB collapse. Brent’s backwardated curve, the decreased volatility since November, and the Chinese reopening had emboldened fund managers to increase their bets on rising oil prices. And when the banking sector scare came, mass liquidation of longs exacerbated the plunge in oil prices.
“These developments help explain the aggressive nature of the selling that followed once support was broken and volatility began spiking towards the 61% level seen currently,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday in comments on the latest commitment of traders report.
Related: Oil Prices Climb As Iraq's Dispute With Kurdistan Escalates
Hedge funds and other money managers sold WTI and Brent at the fastest pace in more than a decade in the two weeks to March 21. The combined net long position in WTI and Brent plunged to a three-year low, with WTI selling particularly hard, which sent the net long position to the lowest since 2016, Hansen noted. The total net long in the petroleum complex has now plummeted by 50% since mid-January when demand from China’s reopening was the market focus, he added.
“The latest data show that most of the gross longs that we saw added over January and February have now been closed out. Given the more neutral spec positioning, this leaves speculators with quite a bit of room to push the market higher,” ING strategists Warren Patterson and Ewa Manthey said on Monday.
“Although, obviously for that, we will need to see a change in sentiment and an easing in concern over recent developments in the banking sector.”
This week, market sentiment started to improve as concerns about the banking system began to ease, at least for now.
Oil prices jumped by 5% on Monday, with WTI returning above $70 per barrel, amid signs of easing concerns about the global banking sector. This allowed the market to shift focus to a supply concern from Iraq, where a halt to 400,000-bpd of crude exports from the semi-autonomous region of Kurdistan drove prices higher.
WTI surged by 5.1% on Monday, logging the biggest one-day percentage jump since early October last year, per Dow Jones Market Data.
The more balanced speculative positioning of money managers also means that there could be an upside for oil from here, barring another major scare in the banking sector.
Major banks – including Barclays, ING, and Goldman Sachs – have slashed their oil price forecasts for this year following the plunge in prices, but they still expect oil prices to average more than $80 per barrel, and even over $90, in 2023.
The world’s biggest physical traders of oil expect a rebound in prices led by China. Some have also said that commodity markets are likely to be spared from the banking sector meltdown and avoid a collapse in demand and prices like in the 2008-2009 financial crisis.
Chinese Oil Demand Vs Fed Rates
For the rest of the year, the markets will watch how China’s oil demand is evolving after the reopening and how the Fed will act in rates policy. When it last raised the rates by 0.25 percentage point last week, the Fed said the peak rate is within sight, and markets are already pricing in a cut later this year.
The higher rates could also feed into capital availability for U.S. oil producers in the coming months, which could constrain supply growth from America.
“While economic-dampening monetary policy will impact spending and tighten credit conditions, it will also affect available capital for oil and natural gas development that will take months to recover, resulting in a tighter supply outlook in the second quarter,” Ed Longanecker, president of the Texas Independent Producers & Royalty Owners Association, told Houston Chronicle’s contributor Daniel Graeber.
Meanwhile, China’s economic growth could exceed official targets, and consumer mobility and spending could surge after the reopening to super-charge a renewed increase in energy commodity prices, especially crude oil, Wood Mackenzie said last week.
Market volatility is likely to remain high, but a strong rebound in Chinese oil demand amid constrained supply growth could move oil prices higher later this year.
By Tsvetana Paraskova for Oilprice.com
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