Why oil's 7-month slump may be about to reverse

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Oil prices started the new year on the back foot, falling to heavy losses in the first week before staging a timid recovery in the second as demand uncertainty continues to weigh on trading. Concerns about the rapid expansion of COVID cases in China after the relaxation of strict zero-COVID policies continued to weigh heavily on oil prices.

Fortunately, an extension may be on the way, with oil markets reacting positively to the China reopening its borders on February 8, 2023 as one of the final acts of abandonment of the zero-Covid era. More relief is expected to come thanks to Lunar New Year travel providing a boost in near-term demand. The Chinese Lunar New Year lasts for two weeks and is scheduled to begin on Sunday, January 22, 2023, and end on February 5, the date of the rising of the full “Snow Moon”. In fact, the Civil Aviation Administration of China (CAAC) predicted that passenger flights could reach 88% of their pre-pandemic levels by the end of January. However, this may only be a temporary increase unless China is able to weather its latest wave of COVID before oil markets feel confident about the prospects for a sustained increase in demand. But some experts are still hopeful that the worst could be in the rearview mirror. Standard Chartered commodities analysts expressed optimism that the extended sell-off could have reached a tipping point, with analysts saying the seven-month downward trend is likely to falter now. Analysts say the previous hyperbole that triggered a huge spike in oil prices has cooled and been replaced by excessive pessimism, pushing oil prices below the 2023 target.

Related: Oil prices steady as Chinese demand buoys massive oil surge

StanChart points to the oil futures markets, where ‘“…speculative positioning now reflecting an overly bearish view in our view and with crude oil being the least popular positive exposure other than palladium among investors, we think there is now a near term up $5-10/bbl, with more to follow in the second half. With supply risks skewed towards lower supply and with OPEC’s patience likely to be strained by further attempts to push prices significantly lower”.

Commodity experts have forecast demand growth in 2023 to reach 1.04 million barrels per day (mb/d), with non-OECD countries supplying just 9,000 barrels per day (kb/d) of that. Demand is expected to be stronger in the second half of the year, with second half demand reaching 101.1 mb/d, 1.7 mb/d above the H1 average. Analysts say much of this growth will come from the Asia-Pacific region, where they predicted growth will accelerate from 177 kb/d in 2022 to 852 kb/d in 2023, with China seeing demand growth. of 483 kb/d compared to a decline of 350 kb/d in 2022.

Divided Oil Market

At this juncture, we could say that the oil market is almost equally divided between the bulls and the bears.

Hedge fund manager Pierre Andurand is extremely bullish and recently went out and predicted that oil could reach US$ 140/bbl this year if Asian economies fully reopen after COVID-related lockdowns. According to Andurand, the market is “underestimating the scale of increased demand [a full reopen] will bring,” also telling Bloomberg that demand for oil could grow by more than 4 million barrels a day, or roughly 4%, this year. Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners LP, told the Financial Post that oil prices return to $100 per barrel by 2023 while Bank of America predicted that Brent could quickly pass $90 per barrel on the back of a dovish pivot in the US Federal Reserve and a “successful” economic reopening by China.

But there is also no shortage of bears.

Two weeks ago, Credit Suisse broke bull hearts after declaring that the settlement is not done yet, and Brent could see further declines towards the 61.8% retracement at $63.02 a barrel. Interestingly, Brent prices have dropped a further 4% since the dire prediction was made to trade at $80.75 a barrel, implying that the downside risk remains huge. A week ago, a famous oil broker PVM oil wrote on a blog that, “There is no doubt that the prevailing trend is bearish, it is a bear market,” citing hot weather in Europe as well as China’s Covid issues. Another ominous sign: A week ago, Brent futures prices fell back, suggesting that traders believe oil futures prices will be lower than current prices.

Meanwhile, ING strategists see a weak Q1 but stronger pricing from Q2 going forward, writing on a blog last week what, “The oil market looks better supplied in the near term and risks are likely to be on the downside. However, our oil balance starts to show a tightness in the market from the second quarter to the end of the year, which suggests that we should see stronger prices from 2Q23 onwards.”

By Alex Kimani for Oilprice.com

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