oil prices

In the financial market, the announcement has propelled front-month futures oil prices above $79 per barrel (48th percentile for all trading days since 2000), up from a recent low of less than $73 (40th percentile) on June 27.

Benchmark prices now align with the long-term average since the turn of the century, considering inflation, indicating a market that is expected to reach equilibrium by the end of 2023.

The most significant price increases have been observed at the beginning of the futures curve, as the reversal of the previous transition from backwardation to contango structure becomes evident over the past two months.

Brent’s calendar spread for the fourth quarter has reverted to a backwardation of nearly $1.20 per barrel on July 11, up from a mere 4 cents on June 27.

The six-month spread has tightened to a backwardation of over $2.30 (73rd percentile for all trading days since 2000), compared to just 8 cents (42nd percentile) on June 27.

In the physical market, a similar moderate tightening is observed in the spreads for dated Brent barrels scheduled for delivery between August and October.

Both the front-month spread (August to September) and the second-month spread (September to October) are currently trading around the 75th percentile.

From a fundamental perspective, the production cuts announced by Saudi Arabia and Russia are anticipated to eliminate excess oil supply from the market.

These measures aim to counter the lower-than-expected economic growth and petroleum consumption in North America, Europe, and China during the third quarter.

In terms of positioning and sentiment, these actions are also countering the accumulation of a remarkably large number of bearish short positions, offering inspiration to fund managers seeking to adopt a more bullish stance.

By the end of June, the total number of hedge fund short positions across Brent and WTI had risen to 239 million barrels, up from less than 100 million in April.

This marked the highest number of fund short positions since November 2020, during the height of the coronavirus epidemic.

The surge in futures buying, aimed at covering existing bearish short positions and establishing new bullish long positions, has contributed to the price increase.

Since most fund positions are concentrated in nearby months, where liquidity and volatility are at their peak, this wave of buying has accelerated the return to a backwardation structure.

Following the recent announcement, oil traders anticipate a moderately tight balance between production, consumption, and inventory for the remainder of 2023, assuming global economic growth remains sluggish.

However, if economic growth gains momentum, the market could tighten rapidly, leading to a swift escalation in prices and spreads towards the end of the year.

The exceptionally low level of hedge fund positions in crude oil suggests significant room for position-building to anticipate, expedite, and amplify market movements.

The combined net position of 258 million barrels on July 3-4 remains in the 6th percentile for all weeks since 2013 (the 50th percentile would correspond to a position of approximately 484 million barrels).

In the event of feeble growth, Saudi Arabia and Russia may face pressure to extend the production cuts beyond September in order to prevent a decline in prices and spreads.


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