Any fund manager worth his or her salt would confess that the three most significant factors they follow and the ones that have profound impact on the formation of oil prices are the underlying fundamental backdrop, which includes macroeconomic developments, the technical state of the oil complex and finally, positioning, which mirrors the views of money managers. It is worth summing up the current health of these constituents of the equation in the light of light of last week’s performance with particular focus on the latest Commitment of Traders reports.

The week kicked off with somewhat of a shock as the OPEC+ producer group, whilst expanding its production constraints till the end of 2025, decided to gradually roll back the voluntary cuts of 2.2 mbpd over a year starting October. The move was greeted with a selling spree although the alliance was at pains to emphasize that the ultimate decision will depend on market conditions, ie. on the price. Notwithstanding this move, it is not an unrealistic expectation to see global and OECD stocks decline in the third and the fourth quarter of the year, the extent of which will depend on which forecasters demand estimate will prove more accurate. The EIA and OPEC will release their updated findings tomorrow followed by the IEA a day later. Presently, however, the picture is somewhat gloomy, at least this is what the weekly inventory reports on US stocks insinuate as commercial stockpiles keep growing, matching the 5-year average but exceeding last year’s levels by 1.7%. Comfortable stocks are reflected in depressed crack spread values, although it must be pointed out that Brent CFDs are strengthening, which might be the harbinger of rising refinery demand for feedstock crude oil.

Oil started last week on the back foot but recovered impressively from the sell-off. Macroeconomic perceptions, on the other hand, were the exact opposite. The rate cuts announced by the Bank of Canada and the European Central Bank last week definitely brightened investors’ mood hinting at the successful battle against inflation. The fall in US April job opening data on Wednesday and the increase in initial jobless claims on Thursday provided additional buoyancy but hopes of a Fed rate cut suffered a blow on Friday as nonfarm payrolls increased much more steeply than anticipated. Yet, global equities advanced further and bond yields fell despite Friday’s considerable jump last week implying solid economic backdrop. Weaker equities and stronger dollar observed this morning because of the shock dissolving of the French national assembly resulting from the far right gaining ground in the European parliamentary elections yesterday should only have a brief negative impact.  One can only wonder when the huge gap that opened up between stocks and oil will start narrowing again. In mid-April one unit of the MSCI All-Country Index was worth 8.2 barrels of Brent crude oil, by Friday’s settlement this ratio stood at 10.

As detailed in today’s technical note the weekly chart reading is still more on the negative side. The bounce off the last week’s trough was impressive but the fast and slow-moving weekly averages are acting as resistances and the slow stochastics are negative – albeit in oversold territory. Once these moving averages are broken above and the oscillators start to wobble and flip the recent pessimism will be alleviated and turned into optimism.

Speculative oil positions have gone through seismic changes in recent weeks, in simple terms it is bonkers. For the week ending June 4 investors kept $16.5 billion in the five major futures and options contracts, the lowest since the pandemic. They cut their exposure by 75% in the last two months. In Heating Oil they are net short. The long/short ratio is consequently under 1, whilst it is just over 2 on RBOB and WTI and under 2 on Brent and Gasoil. These are historically low levels, which indicate disinterest in oil. On the other hand, the lower they fall the more likely they rebound.

And finally, let us turn our attention to the two major crude oil contracts. Combined net speculative length (NSL) descended to 164 million bbls from 319 million bbls the previous week and down 69% in the last 8 weeks. What is, however, even more staggering is the loss of market share of Brent of the crude oil pie. The European benchmark was responsible for 76% of the crude oil NSL just 5 weeks ago and this proportion dived to 28% last week, chiefly because of the week-on-week reduction of more than 100 million bbls. NSL in Brent is now 46 million bbls, the lowest for 12 years. This severely diminished net length is composed of 218 million bbls of gross length and 172 million bbls of gross short positions. In other words, it is not just bulls that closed out their positions but there are a growing number of investors who believe in protracted weakness. Whether they will prove correct is dubious. The seemingly bearish outlook is not confirmed by the somewhat persistent backwardated structure. It indicates a backdrop that is actually not as disheartening as the Brent NSL figures propose.

The loss of market share of Brent reveals that tangible supply disruptions from the Middle East or Russia are not forthcoming. It also implies that the OPEC+ decision at the end of the previous week to re-introduce barrels will impact Brent more negatively than WTI.

 Additionally, it shows that the inclusion of WTI Midland in the Brent basket and the perpetual and solid increase in US crude oil exports provide relative support to the US benchmark. Thus, the WTI/Brent arbitrage is unlikely to weaken meaningfully on a prolonged basis. Looking at the wider picture, the mood has been bitter, however, at the first sign of enhanced demand prospects those who are on the defensive now will likely start firing from all cylinders and get back on to the gravy train also encouraged by comparatively low prices. After all, it takes less effort to achieve a, say, 10% return with prices at $80/bbl than at $90/bbl.
 

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