Mid week Oil update: Another “ouching” moment

Given the surge in gasoline demand, traders are assessing the prospects for a US seasonal surge and OPEC+'s efforts to " ouch " speculators. At the same time, news that Russia was cutting production helped prices rise also.

And given that 70% of oil demand is tied to the service sector in both the West and China, where there is still plenty of room to rise back to trend, such strong growth in oil demand should be expected by the end of this year.

Indeed, the IEA supports a similar view, suggesting more room to run.

That is not to say commodity fundamentals have been blue sky. Crude oil output in Russia has surprised by a remarkable 2 million bpd since the middle of last year, leading to stronger-than-expected exports of crude oil and distillates.

The tidy redirection of Russian barrels, particularly to Asia and the Middle East, was further met by rising exports of Iranian barrels on a sharp decline in floating storage, all of which explains why oil inventories, except for stocks on water, have continued to rise, despite the announced OPEC+ curtailments.

So Russia could be the key; if they follow through with cuts, oil prices will stand a better chance of rising even during these overcast economic times.

While I think the downside is limited ahead of the June OPEC, we could be nearing that point where the speculator community turns around and dares OPEC to create even more spare capacity than the current 5mm bpd, which could ultimately lead to discord within the ranks of the oil producers group.

Paper selling

There has been massive selling in the oil complex as the cost of holding positions against higher funding costs and more volatility have made the oil market unattractive. In the past 30 days, oil has seen 250 million barrels of paper selling.

Remarkably positioning is now as short as it was during Covid when inventories reached record levels, breaching capacity constraints which caused oil prices to turn negative quickly.

Why has market positioning swung so negatively?

In our view, mounting concerns over the financial sector's health, US debt ceiling risks, fears of an impending demand slowdown in the West, and a deflationary funk in China have further raised fears of an upcoming US or global recession.

The bottom line: investors have been cashing in their commodity inflation insurance premiums.