Money Managers Turn Bullish on Oil
Sentiment in oil markets remained very bearish for most of 2024 amid fears of weakening global demand, weak Chinese economy and a potential oversupply in 2025.
Commodity analysts at Standard Chartered continuously reiterated their bullish stance, arguing that the extreme bearishness was unwarranted. Well, StanChart appears to have been vindicated, with oil prices trading above $80 per barrel for the first time since August.
Lately, prices have pulled back a little due to the uncertainty of energy policies under Trump. And now StanChart has reported that the bulls are returning to oil futures markets. According to the experts, money managers have added a significant amount of length to the market in recent weeks. StanChart’s proprietary crude oil money-manager positioning index has climbed 19.7 points to a six-year high of +41.3, with longs across the four main Brent and WTI contracts increased by 43.8 mb w/w to 677.7 mb compared to an increase of 11.8 mb in short positions to 192.3mb. The net long has now increased by 339.8 mb since the end of October, an average rate of 4.4 mb/d.
StanChart notes that the size of the net long is still less than the average net long over the past five years (408.3 mb) and close to the average over the past two years (308.4mb). However, the rapid rate of increase in the net long over the past two months seems out of kilter with the fundamental views of most of the largest funds. The analysts say this can be chalked up to the big traders beginning to accept that the 2025 outlook was not as grim as previously thought, although they have not yet switched to a belief that the market will tighten significantly. This suggests that a lot of the new length is short-term tactical and would need a constant flow of positive news to maintain the positive momentum.
Meanwhile, the latest Baker Hughes survey has revealed that U.S. oil drilling has declined dramatically to just one rig above its post-pandemic lows. Active oil drilling rigs fell by two w/w to 478 in the latest survey, leaving activity just one rig above its post-pandemic low; 149 rigs below November 2002’s post-pandemic high and 73 rigs lower than at the time of President Trump’s 2017 inauguration.
The rig count has been in a downwards trend for over two years, with companies’ strategies remaining relatively conservative and productivity gains allowing output growth with fewer active rigs. Commodity experts at Standard Chartered have predicted that drilling will remain subdued in 2025, primarily because oil prices remain too low in real terms to justify expansion during a period of significant cost inflation. According to cStanChart, U.S oil production, and particularly unconventional (shale oil) production, has changed significantly from the time Trump first took office in 2017.
StanChart points out that U.S. crude output clocked in at 13.40 million barrels per day (mb/d) in August 2024, an all-time high above the previous record of 3.31 mb/d set in December 2023. U.S. crude production has increased by 4.7 mb/d since the pandemic-era low of May 2020; however, it’s just 0.4 mb/d higher than the pre-pandemic high of November 2019, working out to an annual production growth rate of just 80 thousand barrels per day (kb/d) over this timeframe.
Europe Gas Demand Surging
European natural gas prices have soared to nearly €50 per megawatt-hour, near a three-week high, thanks to robust demand. EU gas inventories have drawn sharply in recent months , taking them 17.28 billion cubic metres (bcm) lower y/y. The draw accelerated in the week ended 19 January to 6.49 bcm, the fastest clip since February 2021. The faster-than-usual draw is due to both supply and demand: demand averaged 1.63 bcm/d in the first 18 days of January, 11.7% higher y/y and the highest in any month since January 2021. Meanwhile, imports have been sluggish, falling 129 million cubic metres per day (mcm/d) m/m and 136 mcm/d y/y for 1-18 January.
The largest element is the fall in imports from Russia (from 113 mcm/d to 64mcm/d) following the cessation of transit flows through Ukraine. EU imports of Russian pipeline gas are now 373 mcm/d (85%) lower than the 2021 average and total EU imports of Russian gas (including LNG) are 342 mcm/d (72%) lower. However, StanChart says that the fill will be larger in 2025 if the EU Commission target of a minimum 90% fill on 1 November is to be achieved.