In today’s recipe, we will learn how to send oil prices down by $10/bbl. Start with a good helping of inflationary pressures, a dollop of rising interest rates, a sprinkle of US banking turmoil, a spoonful of anxiety over a potential US default, and finish off with a dusting of weak Chinese data. Mix well, bake for four weeks, and voila!

This past month or so has been unkind to those of a bullish disposition, and last week was no different. Both crude benchmarks booked a fourth consecutive week of losses and in doing so notched their longest weekly losing streak since November 2021. Oil’s most recent slump has forced a rethink over bullish forecasts. Sure enough, the great and good of Wall Street have been leading a wave of downward revisions. Morgan Stanley, Citi and BofA have all trimmed their 2023 Brent price forecast this month. Even dogged oil bulls at Goldman Sachs are losing faith. They no longer expect Brent to hit $100/bbl in the second half of 2023. Needless to say, this is a symbolic blow for those pinning their hopes on a return to triple-digit oil prices. All the while, in its short-term energy outlook for May, the EIA lowered its forecast for the average price of Brent crude oil in 2023 to $78/bbl, well below its forecast of $85/bbl in April.

The oil market has been unable to shake off its negative bias amid demand worries driven by concerns about the macroeconomic backdrop. And with bearish sentiment at the front of the oil curve, shorts have returned with a vengeance. Indeed, data from exchanges showed that short sellers have regained control of the market. In the three weeks to May 9, money managers slashed their net bullish bets on the world’s most important crude oil futures and options contract by more than half. Net long positions in ICE Brent plunged by 129 million bbls over the period to a 2023-year low of 122 million bbls. The liquidation was driven by both sides of the trading coin. Gross longs declined by 63 million bbls while gross shorts increased by 66 million bbls to above 100 million bbls for the first time since June 2021.

Traders have dumped bullish bets leaving oil prices with only one way to go. Yet from this chair, the sell-off looks overcooked. And this author is willing to bet that the feeling is shared. It’s hard to find a proper justification for the growing bearishness in the oil markets. The fact is that the price action out of sync with oil’s fundamentals. Consequently, there can be little doubt that oil prices are well below what most would argue is fair value and a correction will be only a matter of time.

For all the alarmism on the demand side of the oil equation, the outlook remains supportive. Last week, the EIA lifted its consumption growth expectations for this year. Meanwhile, OPEC maintained its robust demand estimates. All eyes will now be on the IEA to see if it shares this optimism when it releases its updated demand projections tomorrow. As things stand, the global economy continues to tick along, and the near-term demand picture remains positive.

All the while, on the supply front, fresh OPEC+ cuts suggest that the producer group is serious about defending the $80/bbl price floor. Coupled with flattish non-OPEC supply, this should ensure supplies remain tight over the coming months. Sure enough, hefty stock draws are pencilled in for the second half of the year, which in turn will lend support to oil prices.

With the market shifting into a deficit from next month onwards, the current negative sentiment is on borrowed time. Better said, prices are on the cusp of heading higher. Echoing this feeling are the latest price polls from Reuters and Bloomberg showing a consensus that Brent will average $87/bbl in 2023. The international crude benchmark has so far averaged $81/bbl.

The recovery will be spurred by a combination of seasonally strong demand, OPEC supply restraint and inventory draws. In short, there are plenty of supportive factors on the horizon. Even so, the majority of market players are still indifferent to looming bullish balances. This brings with it the risk of them getting caught short as Brent prices head back towards $80/bbl and $90/bbl thereafter at the year-end. In the words of George Harrison “All Things Must Pass”, and so it is with the current oil price slide.