Speculative appetite is ticking higher

Brent crude hurt by fear of higher for longer US rates and lukewarm Chinese economy. Brent crude traded between USD 81.72/b and USD 84.08/b last week and sold off 1.8% Friday to Friday with a close of the week of USD 82.08/b. Optimism for oil was tempered on Friday by strong US payrolls data which together with surprisingly high US PCE inflation the week before indicates that the US Fed may have to keep rates higher for longer and hurt the economy and oil demand in the end. Brent crude sold off early this morning dipping down to USD 81.35/b with concerns over the strength China’s economy this year as there has been limited signals coming out of the National People’s Congress with respect to stimulus. Chinese iron ore has sold off 4.6% as a result and probably smitten over to oil as well. Brent crude is however off the lows and trading at USD 82.2/b at the moment of writing.

Bjarne Schieldrop, Chief analyst commodities, SEB

Bearish concerns are fading as inventories ticks lower and market is trusting OPEC+ resilient. It has been popular to be sensibly concerned about the global economy, about oil demand, about OPEC+ resilience and about US shale oil discipline. There has thus been limited conviction for quite some time that Brent crude would manage to stay at USD 80/b level or higher. But total commercial US crude and product stocks have ticked lower and lower so far this year and are now down 28 m b since the end of 2023. Global  floating stocks are down 11 m b so far this year as well. This points to a global market running a deficit. Net long speculative positions have moved steadily higher since mid-December 2023 in a reflection of this together with receding fear that the US and the global economy will fall apart in 2024. News this morning (Bloomberg) that 16 million barrels worth of a Brent crude June call option with strike USD 95/b is underpinning increasing conviction for the upside in oil prices.It is basically a conviction founded on 1) US shale oil production growth will be muted in 2024; 2) Global demand will grow at a fairly normal pace and 3) That OPEC+ will control the market and keep the balance on the tight side thus drawing inventories lower and the price gradually higher.

US Shale oil consolidation is at the very foundation of growing bullish views. Speculative convictions for higher prices are not based on a rallying, robust global economy but more that the global economy is not going to fall apart. But the absolute, most important basis for Brent crude prices at USD 80/b or higher is the consolidation of US shale oil with close to zero growth from Dec-23 to Dec-24 and limited growth in the years to come. This again hands the power in the oil market back to OPEC+ and OPEC+ knows it. This was very well explained by FT’s ’Energy Source’ on 15 Feb this year: ”Shale’s new era spells higher oil prices” where Conrad Gibbins at Jefferies states: ”…we’re headed towards higher oil prices. It’s not a question of if, it’s a question of when”.

Total US crude and products incl. SPR has declined into the new year.

Source: SEB graph and calculations, Blrg data, US EIA

Total US commercial crude and product stocks have declined into the new year and are now well below last year same time.

Source: SEB calculations and graph, Blbrg data, US EIA

Net long speculative positions in Brent and WTI ticking gradually higher

Source: SEB graph, Blbrg data

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