Markets step into the week with a quiet but uneasy feeling after what seemed a free-wheeling ride in the first few days of 2024. The over-exuberance of early bulls in equity markets that eventually had to succumb to repricing the forward predictions of interest rate cuts, leave a residual investor hangover and with Japan being closed today, the forthcoming Chinese New Year and the publication of inflation data later this week in the US and China there are powerful reasons enough to be reticent. China continues to hold its mantle as a negative influence indicated by the fall in the Hang Seng which counter to the US bourses, has now lost all it has gained from over a year ago. Stock markets are now approaching the reporting season with major banks the first to publish and investors will require a spate of decent data across the gamut of industries if the current high level of share prices are to be justified.

Oil is similarly stymied but for different reasons. The settlements on Friday saw WTI +$2.16/barrel, Brent +$1.72/barrel, Heating Oil +1.29 c/gal, RBOB -0.08 c/gal and Gasoil +$15/tonne from the last trading day of 2023 with miserly changes not really being representative of some of the wild swings seen intraday. Our level of confusion within oil circles has just been made that much worse by Saudi announcing cuts to its official selling price (OSP). Although there is little surprise in the size of the cut, especially to Asia by $2/barrel and the lowest for over 2-years, it comes at a time when a charm campaign is undertaken by OPEC/OPEC+ on unity as it eventually agreed to a meeting in February, but is clearly in response to competition for Saudi customer space and that delivery prices continue to fall. Oil watchers are rightly questioning that the Kingdom's cut is not only aimed at quelling interference from non-OPEC supply but from its very own cartel membership.

2024 is already signalling caution for oil

It is way too early to believe that the modus for trading in oil in 2024 will be similar to that of 2023 but judging by the ability of the market in the first few days of the year to harry shorts and longs within the same sessions, it bodes ill for those that might hope this interminable period of short-termism might be over. This market calls for caution and many will look for the stretches in ranges to be entry points be they longs or shorts, but who determines when or where the stretches are? The middle ground of the price action will continue to be dominated by fast money and the so-called ‘pivot’ prices of CTAs and their like, and arguably what oil might just lack is an institutional, follow-on bid.

This type of long-term investment requires a steady, higher trend, preferably one that is accompanied by backwardation which the most stubborn and hardiest of bulls would find extremely difficult to guarantee. Even the notoriously bullish Goldman Sachs have crept into a what is all but a ‘don’t know’ call for Brent by last week trimming $10/barrel from its prediction and expecting the world’s marker crude to stay within a range of $70-$90 in 2024, even going on to apply a peak in estimation of $85/barrel by June citing the increase of non-OPEC supply highlighted by how the United States is maintaining production at over 13mbpd.

Services and Composite PMIs from Germany, France and the Eurozone remain alarmingly in contraction and while China and the US’s own markers of behaviour outside of manufacturing increase slightly, the former’s largely due to stimulus, the world’s thirst for refined product has seen a recent negative spotlight. JP Morgan, quoted on Bloomberg, set a cautionary note opining global oil demand growth at 1.3mbpd in December was 200kbpd lower than expectation, blaming a warm winter that has pressured US distillates and lower road mileage from flagging economies such as China and Germany. Staying with the US, Gasoline stocks registered the largest 1-week build for 30-years and highest weekly Distillate build for 5-years, with Gasoline implied demand at a year low and Distillate consumption the lowest since 1999.

Indeed, personal behaviour is also showing some signs of trimming as, according to a preview from OPIS, Jet Fuel growth in 2024 will start to run out of steam as the recovery in air travel from the trough seen during the pandemic regained 2019 levels by May 2023, have been steady ever since and therefore signalling a completion in revival. The International Energy Agency (IEA) forecasts that Jet Fuel and Kerosene consumption will stall at 7.19mbpd in 2024, unchanged from 7.20mbpd in 2023. OPIS look to the slowing global economy as predicted by the IMF, the poor economies of Europe and how its citizens will be adversely affected by interest rates and an increase of fuel efficiency in modern aircraft.

There is little doubt that with wars, be they proxy or face-on, raging on parts of the European/Asian borders offer the X-factor and any price forecasting or strategic positioning must involve geo-political considerations. However, these considerations continue to make oil an unattractive proposition for institutional investors, war premium spikes and ephemeral African production shut-ins are not confidence builders. In fact, and of late, they are drivers in terms of flat price that are the stretches, referred to earlier, as points of entry for those that consider the wider economic backdrop and the subsequent state of oil demand to be more important than whether 8% of the world’s oil has to divert around Africa rather than traverse the Mediterranean via the Red Sea. If global banking heavyweights are signalling caution for oil, those that are in charge of where the very big money goes are likely listening.
 

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