Oil markets are waking up and look bearish. Brent crude oil fell by over 5.5% on Tuesday to under $40 per barrel for the first time since June.
Brent crude has been limbering along under $45 per oz for months in anticipation of a demand pickup that has not materialised. So rather than a price breakout to the upside in oil, traders have lost patience, pulling long positions and putting downward pressure on the price.
As of last week, the downside breakout occurred. We posted the rising wedge breakout at the time.
Chart: BCO/USD (6-months)
Demand forecasts too upbeat
In the last month, the International Energy Agency (IEA), OPEC and Wall Street analysts have all pared back forecasts for a demand recovery this year and next. The combination of deep OPEC+ cuts and defaults on the US shale oil patch helped see the oil price more than double off its lows in March. However, the rally lost momentum and has now rolled over because the demand side could not match up to the kind of expectations that gave OPEC+ confidence to ease off on production cuts.
Travel not happening
On a global basis, economies have been bouncing back from the steep decline during lockdowns in the second quarter. Higher economic activity typically spells higher demand for oil. PMI indicators show a V-shaped recovery for both services and manufacturing. However, travel - a primary source of demand for fuel (50% of consumption in the USA) has not bounced back to anything close to pre-pandemic levels.
Until A) governments loosen travel restrictions and B) People’s confidence to travel significantly improves, the outlook for oil demand is likely to flounder and remain well below pre-pandemic levels.
At the same time as futures markets have dropped, spot prices have held steadier- leading to an even wider state of contango in the 3-month time spread.
Put simply oil buyers are increasingly willing to pay more now for oil than they are for future deliveries. It would suggest oversupply fears are growing within the market. That makes sense in the context that demand forecasts for this year and next are falling while OPEC+ has eased its production cuts.
Speculators less bullish
CME positioning data shows speculators reducing net long positions in options and futures markets.
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