A chart analyst would be quick to point to the 13-day m/a supports that did a marvellous job yesterday to halt the rot and tempt shorts to cover and bottom-pickers to pick bottoms. Those following fundamental events will counter saying that dismal readings of Chinese exports and imports, including crude oil purchases, from last month coupled with Moody’s downgrade of ten small and medium sized US banks are nothing but ominous signs about the health of the global economy. To make matters worse, China has experienced deflation for the first time for more than two years. Consumer prices dipped 0.3% in July as stimuli have failed to resuscitate ailing consumption. The two largest demand centres of the world are waving red flags. Equities weakened. Yet, the early slump reversed course in a heartbeat when the Saudi cabinet re-affirmed its support to stabilize the oil market. Or, as the state-owned Saudi Press Agency put it last week the voluntary 1 mbpd supply curtailment “can be extended or extended and deepened”. Economic anxiety evaporated and oil finished the day on an upbeat note with Heat and Gasoil coming within a whisker of recent highs. Without demand support, however, it is hard to foresee unlimited upside potential. Prices remain stable this morning despite economic headwinds helped by US product draws reported by the API, albeit crude inventories built more than expected.

In the perpetual battle between economic concerns and resolute supply cuts, one would have thought that any deterioration of the oil balance would originate in notable downgrades in global oil demand. Although the EIA’s latest findings released yesterday revised the call on OPEC oil lower it was down to an upward amendment in non-OPEC supply. It now stands at 68.32 mbpd in 2H 2023 and 68.36 mbpd in 1Q 2024, 250,000 bpd and 410,000 bpd higher than estimated in July. Global oil demand was corrected 20,000 bpd higher for the second half of this year and 30,000 bpd lower for the first quarter of next. The pivotal factor from the demand perspective is unreservedly China. Oil consumption in the engine room of growth was left unchanged for the coming three quarters.

The sine qua non of any buoyant oil balance prediction is projected depletion of oil inventories and the latest Short-Term Energy Outlook from the EIA delivers just that. Notwithstanding the marginal deterioration in OPEC call, which will plausibly be neutralized by the producer group’s determined action to tighten the market, OECD oil inventories will plunge to 2.805 billion bbls in 3Q and to 2.781 billion bbls in 4Q only to rise negligibly to 2.784 billion bbls in 1Q 2024. Consequently, the EIA remains upbeat on prices. It sees Brent averaging $86/bbl in 2H 2023, up $7/bbl from last month to reach $88/bbl by the year-end, staying around that level in 1Q 2024. This compares with the current curve of $85/bbl for 4Q and $83.50/bbl for 1Q. 

No Commitment from Money Managers

“…oil is here on merit alone. We are not artificially held by fund inflows alone and in many ways makes for a healthier market.” The above quote is from yesterday’s note and this accurate observation can be quantified. Lack of enthusiasm from financial investors is firmly on display in the Commitment of Traders reports published every Friday by the CFTC and ICE.

To begin with, the amount of money invested in the five major oil futures contracts has risen considerably in recent weeks but is still meaningfully below historic averages and peaks. For the week ending August 1 investors poured $53 billion in the oil market, which is more than double of this year’s low observed in May at $22 billion. The assets that are under management in oil futures and options, however, are nowhere near the peak of $85 billion seen last June when the impact of Russia’s invasion of Ukraine was anything but unambiguous. It is also materially under the level of $72 billion observed two years ago.

The key word here is uncertainty. The supply side of the oil equation is price supportive. The supply management of the OPEC+ group has a palpable influence on investor’s thinking. No wonder, the adventure back into energy began in April when Saudi Arabia announced its intention with others to voluntarily reduce production in its effort to tighten the oil balance. It has taken time and several additional attempts for the market to actually believe that the move will lead to significant stock depletion but ultimately the sentiment has turned – somewhat.

Lack of unreserved enthusiasm is the function of ominous demand side developments, primarily a struggling Chinese economy. No doubt, money will find home in oil once the second biggest economy of the world starts its revival, whenever that inflection point comes. Until then, however, the mood of managed money and its commitment to energy will remain pragmatic and limited.

It is particularly true considering that the latest increase in NSL was the result of upbeat product outlook, especially distillate. Combined NSL of WTI and Brent has been up 59% since mid-May, but Heating Oil net length has quadrupled whilst ICE Gasoil has flipped from net short to net long in the past 2 ½ months. Net speculative length in the RBOB contract has swollen from 44,000 lots to 78,000 contracts during the same period. Although yesterday’s confident jump took the prices of Heat and Gasoil close to recent highs NSL in these two contracts together with WTI and Brent are still under the peaks registered two years ago. It is probably fair to conclude that money managers are presently dubious about the sustainability of the recent uptrend, and they envisage more attractive returns outside the oil arena – let them be AI stocks or the dollar. Once, however, demand shows auspicious developments, and by that we mean tangible improvement in global manufacturing, these investors will not shy away to hit the accelerator as hard as they can and re-allocate sizeable funds back into oil.

Overnight Pricing