Some would argue that the geopolitical risk premium completely evaporated one month after the Hamas attack on Israel, others are convinced that it is still built in the price and without it the market would be significantly lower. Whatever the case maybe, the fact of the matter is that seemingly there are more pressing issues as far as the oil balance is concerned than the flare up of tension in the Middle East and the anxiety level rose further yesterday. Firstly, fears of entrenched inflation remain at an elevated level after the Australian central bank hiked rates. The counternarrative to inflationary worries would be that equity markets are reassuringly confident. We will dive into the topic on Friday. Chinese economic data also plays part in the current weakness. Although crude oil imports rose in October from the previous month and on the year the country’s total exports contracted faster than anticipated entailing a struggling domestic and global economy, which adversely affects the oil balance. Fears of a colder-than-average winter also subside. Crude oil hit its lowest since July yesterday, but Heating Oil and Gasoil were the bellwether of the price fall. No relief was forthcoming overnight. US crude oil inventories swelled 11.9 million bbls overnight. Due to a planned system upgrade the EIA will delay the publication of its weekly statistics until next week.

The global and OECD stock depletion that was penciled in for 4Q 2023 took a reversal, according to the EIA. In its updated Short-Term Energy Outlook, the Administration revised its global oil demand forecast 230,000 bpd higher but non-OPEC supply is now seen 380,000 bpd more than in October. The call on OPEC, therefore, was cut by 150,000 bpd to 27.38 mbpd and when it is assigned to an OPEC output level of 27.58 mbpd the net result is a climb of 200,000 bpd in global oil inventories. The 4Q oil balance has gotten looser, nonetheless it must be stressed that the EIA is by far the most pessimistic on OPEC call.

Perceptible Pessimism amongst Money Managers

The Middle East conflict shows no sign of abating but there is a palpable perception that regional powers, Iran, Syria, Saudi Arabia, and other Gulf producers would not want to be the advocates of further the escalation of the hostilities. Albeit ruling it out would be reckless, currently there is no danger of supply disruption from the region. Thus, attention shifts to the here and now and the picture is seemingly anything but buoyant. Souring investor sentiment is mirrored in the price action. The European crude oil benchmark shed 13% of its value after reaching the post-conflict summit of $93.79/bbl on October 20. As outright prices are principally driven by the financial fraternity the present mood is reflected in the Commitment of Traders reports, both from the CFTC and ICE.

In fact, deserting the oil complex started in the middle of September, well before the awful attack of Hamas on Israeli civilians. The combined amount that is under management in the five major oil futures and options contracts has nearly been halved over the last six weeks; it has dropped from $67 billion to $37 billion, the lowest since July. There are a few curious and telling aspects of the breakdown of this withdrawal of funds. WTI and Gasoil suffered the biggest hits. Money under management is now only 38% of what it was six weeks ago in WTI and 33% in Gasoil. The amount invested in RBOB has roughly fallen by 48% and money managers remained comparatively upbeat on Brent (30% withdrawal) and even more so in Heating Oil (21% withdrawal). WTI might have become unattractive as US inventories have risen 7 million bbls since September (excluding the latest API estimate), possibly due to refinery maintenance, and domestic production breaking over 13 mbpd of late. Gasoil’s misfortune has clearly been set off by the partial lifting of the Russian product exports ban and, as my esteemed colleague pointed it out, by bulging European natural gas stocks.

In the crude oil arena, as emphasized above, WTI has come under a more severe attack than Brent. Its share of the speculative crude oil pie has shrunk from 50% in mid-September to 37% during the latest reporting period. Net speculative length (NSL) in WTI plummeted from 269 million bbls to 118 million bbls, a decline of 56%. NSL in Brent fell 25% during the same period, from 266 million bbls to 200 million bbls. The relative bearishness of the US marker is manifested in the changes of the configuration of the NSL. In WTI longs cut exposure by 89 million bbls in the last six weeks and increased their bearish bets by 62 million bbls. The reduction in Brent NSL consisted of a 48 million bbls cut in long and only a 17 million bbls increase in short positions. The combined WTI & Brent long/short ratio stood at 3 last week (476 million bbls of long position against 158 million bbls of short positions), which is the lowest since July. As a rule of thumb, low long/short ratio implies a possible upside price reversal, nonetheless, it is worth keeping in mind that the current depressed proportion of length is still far higher than the year’s bottom of 1.86 reached end-June meaning that further downside potential cannot and should not be ruled out.

NSL has been generally stable in the Heating Oil contract since the middle of September as it has retreated by a mere 4 million bbls, from 36 million bbls to 32 million bbls with shorts adding 3 million bbls to their gross positions. The 25 million bbls retreat in RBOB NSL is primarily the result of shedding 24 million bbls of speculative length with bearish bets staying broadly put. The fall of 3.8 million tonnes in Gasoil NSL is divided between a drop of 2.7 million tonnes in long positions and an increase of 1.1 million tonnes in short positions. The downturn in prices, as outlined above, are being predominantly driven by CME WTI and ICE Gasoil, consequently common sense dictates that increasing appetite for these two contracts will be the harbinger of the general brightening of mood, something that does not look impending at the moment.
 

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