Oil price rebound silences bearish calls for crude

The past few weeks have been a disaster for oil bulls after energy stocks posted their worst performance since start of pandemic amid fears that interest rate hikes across the globe could dampen global demand. West Texas Intermediate (WTI) crude oil futures fell below $102 a barrel last week, representing a 22% decline over the past two weeks – the technical definition of a market bearish. The funny thing is that it doesn’t look like a bear market, given that crude is still up around 40% this year. Some oil bulls are also unconvinced that the epic bull run is over, with Goldman Sachs expecting oil prices to cap at $140 per barrel.

Earlier this week, spare capacity issues sparked a rally in crude, with WTI trading above $113 on Wednesday morning.

However, at this point the bears continue to argue that the market is not as tight as many analysts believe.

Last week, investors sold oil futures at the fastest rate since just after Russia invaded Ukraine, with a deteriorating economic outlook largely to blame.

Money managers and hedge funds sold the equivalent of 71 million barrels in the six largest oil futures and options contracts in the week to June 21, according to Reuters. Based on ICE Futures data from the US Commodity Futures Trading Commission, this marks the fastest selling clip since the week ending March 8, shortly after Russia invaded Ukraine.

Related: Australia faces energy crisis despite natural gas abundance

Sales over the past two weeks reached 82 million barrels, reversing purchases of 99 million over the previous four weeks. NYMEX and ICE WTI (-35m barrels) and Brent (-30m) were the top sellers, with small sales of US diesel (-4m) and US gasoline (-3m) . Only European diesel (+1 million) recorded purchases.

Indeed, existing bullish long positions were reduced by 65 million barrels while 6 million barrels of new bearish short positions were initiated; the net position on the six contracts was reduced to just 564 million barrels, from 647 million barrels, while the ratio of long positions to short positions fell to 5.68: 1 (74th percentile) from 6.68 : 1 (84th percentile) fortnight earlier, implying creeping profit-taking among once-bullish fund managers.

Looser markets

But it’s not just the futures market that portends growing bearish sentiment in oil markets. Physical crude markets could offer telltale signs that the bull run may be on its last legs.

Citibank‘s Ed Morse released its latest bearish oil report on Tuesday, forecasting $75 in Brent in 2023 and ~$50 in Brent prices thereafter.

According to the analyst, the oil market is “looser” than the OECD stocks indicate, a clear negative signal for oil prices. Morse says he expects inventory build in China in the second quarter and more than 2MB/d of inventory build in the last quarter of the year. It then sees Iran increasing production volumes in the first quarter of 2023, while US producers are expected to accelerate growth and increase liquids production by 1.8 mb/d.

Additionally, Morse claims that Russian production will not fall as much as oil bulls had hoped, and expects Russian production to fall by 1.0-1.5 mb/d by the end of the month. the year, below the 2.0 to 3.0 mb/d that some analysts have forecast.

Source: Alpha Research

That said, bulls can take some comfort in the fact that Morse is somewhat of an oil permabear and began calling for a 50% drop in oil prices in March at the peak of the oil price hike. .

He has, however, been consistent in his support for the bearish call, with rising US shale production and rising Iranian oil production being his main counterpoints. It should also be noted that current oil prices are much closer to Morse’s target of $75 a barrel than Energy Rystad‘s $240 a barrel, which the Norwegian punter had projected for the current summer.

By Alex Kimani for Oilprice.com

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