Reasons to be optimistic despite the recent collapse in oil prices

Oil prices have been extremely volatile over the past week, with Brent trading in a range of $6.75 per barrel (bbl), hitting a seven-month low of $75.05/bbl intraday on August 5, thanks to bearish news coming from the world’s largest economy. . The the most recent US Jobs Report revealed that the economy added 114,000 jobs in July, well below the Wall Street consensus of 176,000 jobs. The unemployment rate rose to 4.3 percent from 4.1 percent the previous month, breaking a previous trend of staying below 4 percent for the longest stretch in decades. Declining jobs and inflation data sent the markets into meltdown modewith markets around the globe growing.

Oil prices rebounded in the intraday session on Wednesday, with Brent gaining 2.8% to trade at $78.62 a barrel, while WTI climbed 3.1% to $75.48 a barrel, thanks to increasing tensions in the Middle East. According to ING, the conflict in the Middle East is the biggest bullish catalyst that has stopped the oil price sell-off, as markets wait to see Iran’s response to the assassination of the political leader of Hamas by Israel last week. And now commodities analysts at Standard Chartered have revealed that the latest decline was due to the rapid closing of long positions, not new short ones. StanChart says there is there were 135.2 million barrels of long liquidation by money managers over the past two weeks in the four main Brent and WTI

contracts. According to analysts, closing shorts outnumbered new shorts by about five to one, while money management shorts increased by 27.4mb over the past two weeks. Commodity experts noted that the only time there was a liquidation longer than two weeks was in February 2020, at the start of the Covid-19 pandemic and the OPEC+ price war. The close of long bets has only exceeded 130mb in two weeks four times, two of which were in the last three months.

Ascending revisions

According to StanChart, on a purely fundamental basis, there is scope for Brent prices to rise above $80/bbl given robust demand and a significant pullback in global equities in Q3. In May, Standard Chartered claimed that the US Energy Information Administration (EIA) had systematically underestimated demand for transportation fuel and predicted that we were likely to see significant upward revisions. Well, StanChart was vindicated, with the EIA revising May gasoline demand up 344 kb/d to 9.396 mb/d, good for a 3.5% y/y increase. Jet fuel demand rose 5.9% y/y, while total oil demand was revised up 811 kb/d to 20.8 mb/d, good for 2.3% growth. Only demand for distillates remained weak in the revised data, although the -3.6% Y/Y decline is significantly lower than the EIA’s prediction of a -7.1% decline.

StanChart notes that US gasoline demand has been revised higher in 20 of the past 24 on Monday, with an average revision of +146kb/day, which is 1.6% of demand. May review it was the second largest during that period, surpassed only by the 478 kb/day upward revision of the application from September 2023.

Meanwhile, US oil production growth remains muted. With the reporting season at an end and some large producers yet to report, data from 27 publicly traded oil and gas companies (including major international oil companies) show that combined US oil liquids production in Q2 was 7.347 mb/ day. , 181 kb/day (2.5%) higher than Q1. However, StanChart notes that this improvement can largely be attributed to a recovery from production shutdowns in January due to extreme cold, with oil liquids production growth over Q4-2023 coming in at just 15 kb/d (0, 2%).

Fortunately for the bulls, there may not be much downside to oil prices right now. StanChart’s machine learning tool SCORPIO predicted a Brent price of $76.19 per barrel (bbl) on August 12, less than $1/bbl lower than the current price. StanChart notes that SCORPIO can provide a useful early warning system, with its October Brent settlement forecast on August 5 at $76.19 per barrel (bbl) close to the actual settlement at $76.30/bbl. It is interesting to note that the SCORPIO prediction was made a week before bearish US economic data.

BlackRock weighed in on the latest loss in global markets on a bullish note, saying the US recession fears are exaggerated. The asset manager argued that July’s US jobs report is more in line with a slowdown than a recession. BlackRock notes job creation is slowing but has averaged a robust 170,000 over the past three months; Consumer spending, while cooling, remains relatively healthy and Q2 corporate earnings have so far beaten expectations, with S&P 500 Earnings growth was projected at around 13%, up from the 9% expected at the start of the season. BlackRock is the world’s largest money manager, with $9.1 trillion in assets under management (AUM).

By Alex Kimani for Oilprice.com

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