Oil shorts are not ready to give up

The big oil price rally that started last week and pushed the price of oil up nearly $10 a barrel has started to wind down. Brent crude futures for December delivery were trading at $76.63 a barrel at 11:40 a.m. ET on Thursday, while WTI crude was changing hands at $73.24 a barrel. This marks a sharp decline from their 2-month high of $81.12 for Brent and $77.91 for WTI crude. The rally was sparked by Washington’s indication that Israel might strike Iran’s oil facilities.

Citi analysts provided estimates that a major Israeli strike on Iran’s export capacity could knock 1.5 million bbl/d of crude off the market, while an attack on downstream assets and other relatively minor infrastructure could remove 300,000-450,000 bbl/day. Iran’s oil output hit a six-year high of 3.7 million bbl/d in August, according to ANZ Bank.

Meanwhile, Clearview Energy Partners predicted 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 US and its allies impose economic sanctions on Iran.

Unfortunately for the oil price bulls, the shorts aren’t about to let up. According to commodities experts at Standard Chartered, the latest rally was sparked by short sellers rushing to cover after the escalation of the Middle East crisis. However, StanChart cautioned that short sellers are not running for the hills. According to analysts, once the decline in price depreciation is taken into account, the market’s response to events in the Middle East, and in particular threats to Iranian energy infrastructure, has been very disappointing. StanChart notes that Brent settlement in the first month of October 7 was lower than settlement for the equivalent days in 2021, 2022 and 2023, while spot prices simply returned to where they were at the end of August. There has been little change in the overwhelming bearish sentiment that has dominated the oil market for the past three months, with many traders still poised to aggressively short oil if the daily news flow and market momentum allow it.

Related: Libya’s oil output restarts as political conflict ends

Indeed, the positioning data shows little change in the week leading up to the October 1 settlement, with net selling by the money manager of WTI crude oil futures outstripping net buying. StanChart’s proprietary Crude Oil Positioning Index was little changed in weight at -69.1. Neither China’s latest stimulus nor rising violence in the Middle East appear to be troubling the shorts.

The ongoing sell-off in oil prices was triggered by the release of the latest Energy Information Administration (EIA) weekly reportwhich StanChart rates very bearish according to its bull-bear index of US oil data. Total commercial inventories fell 0.91 mb/y to 1,267.08 mb, with the deficit below the five-year average widening 1.72 mb to a 20-week high of 20.74 mb. Unfortunately, the bull-bear index was hit hard by increases in crude oil, gasoline and distillate inventories, both in absolute terms and relative to five-year averages. Crude oil inventories rose 3.89 mb/y to 416.93 mb, with the deficit below the five-year average falling 3.46 mb/d to 18.44 mb. StanChart shows a highly unusual trend where every element of the crude oil balance is shifting in the direction of higher stocks; higher domestic production, higher imports, lower exports, lower refinery runs, slower SPR filling and a longer adjustment term.

Natural gas prices in Europe are falling

Meanwhile, European natural gas futures fell below 40 euros per megawatt-hour to 38.52 euros per megawatt-hour, retreating from a 10-month high of 41 euros hit earlier in the week. The decline was largely driven by increased wind power production, along with a steady supply of Norwegian gas.

EU gas inventory growth remained sluggish, with last week’s increase falling to less than 30% of the five-year average. Conformable DATA by Gas Infrastructure Europe (GIE), Europe’s gas stocks stood at 111.05 billion cubic meters (bcm) on October 6, good for a build of 391 million cubic meters (mcm). Three of the daily changes were below 50 bcm, including a draw of 42 mcm on October 2. The deficit below last year widened to 1.5 bcm, while the surplus above the five-year average narrowed to a 23-month low of 6.17 bcm. The current pace of inventory building implies that this year’s seasonal high could only reach 112 bcm instead of the previous forecast of 166 bcm for the August clip.

By Alex Kimani for Oilprice.com

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