The big oil price selloff in the wake of OPEC+’s decision to unwind 2.2M bbl/day in voluntary production cuts later this year has been corrected. The announcement led to front-month Brent falling to a four-month low below $77 per barrel (bbl), good for a hefty $8/bbl decline from the previous week’s high and over $15/bbl lower from April’s YTD high. Thankfully, oil prices have largely managed to pare back the losses with Brent for July delivery changing hands at $82.61 per barrel in Wednesday’s session while the corresponding WTI contract was trading at $78.57.
Commodity analysts at Standard Chartered pointed out that the price undershooting was the consequence of a combination of several factors including extreme macroeconomic pessimism, speculative shorts and over-enthusiastic algorithmic trading that crowded out more fundamentally-based traders. Consequently, oil futures markets flipped to a net short position in Brent, compared with a net long position at the end of the previous week. StanChart has reiterated its previous assessment that not only can the markets absorb the extra barrels by OPEC+ producers but that a deficit is likely to appear in the latter part of the current year and carry over to 2025. The analysts have predicted a particularly large 1.9 million barrels per day (mb/d) deficit in Q3-2024.
On the demand side, StanChart has forecast 1.68 mb/d growth in 2024 and 1.41 mb/d in 2025. StanChart’s latest demand growth prediction is 0.3 mb/d higher in absolute terms and 0.14 mb/d higher in growth terms than its start-of-year expectations. The commodity experts have come up with a supply model split between Declaration of Cooperation (DoC) signatory nations (OPEC+) and non-DoC producers, with DoC crude oil output further split between OPEC and non-OPEC signatories.
They have used highly cautious assumptions about compliance improvements for the three main countries that have recently produced above targets, and assumed they will only converge gradually onto their respective targets. According to the analysts, DoC output is forecast to be slightly lower in Q4-2024 than in Q2-2024, even under a near-worst-case scenario of a very slow return to compliance and limited output compensation by the three countries concerned. StanChart has predicted that the scale and duration of the projected deficits suggest that market sentiment is likely to improve in the coming months.
Bearish Oil Futures
Oil futures traders have opened an unusually large speculative short on Brent in
recent weeks, with the latest CFTC and ICE positioning data revealing that the bearishness in funds intensified after the 2 June OPEC+ meetings.
StanChart’s proprietary money-manager positioning index for ICE Brent fell 48.1 w/w to the maximum bearish reading of -100.0, the first time it did so since March 2020 at the start of the pandemic. Meanwhile, the oil bulls have been totally crowded out, with money-manager net longs in ICE Brent at just 1.51% of open interest, a record-low in data going back to 2010. Net selling of the contract hit a record-high at 103.9 mb, 22.8 mb larger than any single week during the pandemic. Net selling over the past five weeks has hit a cumulative 273.3 mb, 52.5 mb more than the most intensive five-week period of selling during the pandemic. Bearish activity in WTI crude has been less extreme than that of Brent. Net selling across the four main WTI and Brent contracts was 154.9 mb, consisting of a 90.7 mb increase in shorts and a 64.1 mb decrease in longs.
StanChart points out that there’s no justification for selling at a pace that even surpasses during the pandemic. On the brighter side, the analysts say there is scope for a significant short-covering price rally with speculative shorts currently over-extended.
The situation could not be more different in natural gas markets. Henry Hub gas prices have climbed from a 3-year low of $1.61/MMBtu in April to $3.02/MMBtu currently while European natural gas futures jumped nearly 50% since February to €35.8 per megawatt-hour. The rate of EU gas inventory build continues to be below average: according to Gas Intelligence Europe (GIE) data, EU inventories stood at 83.34 billion cubic meters (bcm) on 9 June, good for a w/w build of 1.58 bcm compared to the five-year average w/w build of 2.72 mb for the same period and last year’s build of 2.23 bcm. Europe’s gas inventories have now risen less than the five-year average on 52 of the past 55 days, taking the build above the average to a six-month low of 13.77 bcm. The relatively slow inventory build is largely responsible for supporting front-month Dutch Title Transfer Facility (TTF) gas above EUR 30 per megawatt-hour (MWh).
By Alex Kimani for Oilprice.com