Oil Shorts Aren’t Ready to Give Up
The big oil price rally that kicked off last week and increased oil prices by nearly $10 per barrel has started unwinding.
Brent crude futures for December delivery were trading at $76.63/barrel at 11.40 am ET on Thursday while WTI crude was changing hands at $73.24/barrel.
That marks a sharp fall from their Monday 2-month high of $81.12 for Brent and $77.91 for WTI crude. The rally was triggered by Washington’s indication that Israel could strike Iran’s oil facilities.
Citi analysts have provided estimates that a major strike by Israel on Iran’s export capacity could take 1.5M bbl/day of crude off the market, while an attack on downstream assets and other relatively minor infrastructure could take out 300K-450K bbl/day. According to ANZ Bank, Iran’s oil output hit a six-year high of 3.7M bbl/day in August.
Meanwhile, Clearview Energy Partners has predicted that oil prices could gain as much as $28/bbl if flows are blocked in the Strait of Hormuz; $13/bbl if Israel strikes Iranian energy infrastructure and $7/bbl if the U.S. and its allies placed economic sanctions on Iran.
Unfortunately for oil price bulls, the shorts are not about to give up. According to commodity experts at Standard Chartered, the latest rally was triggered by short sellers running to cover after the Middle East crisis escalated. However, StanChart has warned that short sellers are not running for the hills.
According to the analysts, once the unwinding of the undershoot in prices is accounted for, the market response to events in the Middle East, and particularly the threats made against Iranian energy infrastructure, was very underwhelming.
StanChart notes that Brent’s front-month settlement on 7 October was lower than the settlement for the equivalent days in 2021, 2022 and 2023 while prompt prices have merely returned to where they were as recently as late August.
There’s been little change to the overwhelmingly bearish sentiment that has dominated the oil market over the past three months, with many traders still prepared to short oil aggressively if the daily news flow and market momentum allow for it.
Indeed, positioning data shows little change in the week up to settlement on 1 October, with money-manager net selling of WTI crude futures exceeding net buying. StanChart’s proprietary crude oil positioning index was little changed w/w at -69.1. Neither the latest China stimulus nor the increase in violence in the Middle East seems to fluster the shorts.
The unfolding oil price selloff was triggered by the release of the latest Energy Information Administration (EIA) weekly report, which StanChart rates highly bearish according to its U.S. oil data bull-bear index. Total commercial inventories fell 0.91 mb w/w to 1.267.08 mb, with the deficit below the five-year average increasing by 1.72 mb to a 20-week high of 20.74 mb. Unfortunately, the bull-bear index was heavily affected by increases in crude oil, gasoline and distillates inventories in both absolute terms and against the five-year averages. Crude oil inventories rose by 3.89 mb w/w to 416.93 mb, with the deficit below the five-year average shrinking by 3.46 mb to 18.44 mb. StanChart points to a highly unusual trend whereby every element in the w/w crude balance changes was in the direction of higher inventories; higher domestic output, higher imports, lower exports, lower refinery runs, slower SPR fill and a higher adjustment term.
Europe’s natural gas prices slip
Meanwhile, European natural gas futures dropped below €40 per megawatt-hour to €38.52 per megawatt-hour, retreating from a 10-month high of €41 reached earlier in the week. The decline was largely driven by increased wind power generation coupled with a stable supply of Norwegian gas.
EU gas inventory builds have remained slow, with the increase over the past week falling to less than 30% of the five-year average. According to data by Gas Infrastructure Europe (GIE), Europe’s gas inventories stood at 111.05 billion cubic meters (bcm) on 6 October, good for a w/w build of 391 million cubic meters (mcm). Three of the daily changes were below 50 bcm, including a 42 mcm draw on 2 October. The deficit below last year has risen to 1.5 bcm, while the surplus above the five-year average has shrunk to a 23-month low of 6.17bcm. The current pace of inventory build implies this year’s seasonal maximum might only reach 112 bcm instead of the previous prediction of 166 bcm going by August’s clip.