China’s restocking effort could be the next bullish catalyst for oil
– China does not appear to be as sensitive to high oil prices as South Asian nations are.
– The most recent positioning of the money managers shows there is still room for more long positioning in oil
– Even after hitting $93 per barrel last week, oil prices have further room to rise in the coming months, with the $100 oil forecast of major investment banks now in sight.
Robust oil demand and the headroom for money managers to expand their long positions in the crude complex, combined with shrinking global spare production capacity and “worrisome” inventory levels, could push oil prices even higher, the world’s largest independent oil trader, Vitol Group, says.
Demand recovery and the mild impact of the Omicron variant on consumption, alongside the Russia-Ukraine crisis and a deep freeze in Texas that disrupted some Permian oil production, sent WTI Crude to over $92 per barrel at the end of last week, while Brent Crude hit $93—levels at which the benchmarks continued to trade early on Monday.
Geopolitical tension aside, the market fundamentals appear strong, and China could add more strength if it moves to replenish some of its crude reserves, Mike Muller, Head of Vitol Asia, told Gulf Intelligence’s daily energy markets video podcast on Sunday.
China could begin filling its crude stocks, even at $90 a barrel oil, because some restocking could be needed, the executive at the world’s top oil trader said.
“I think it’s fair to state that China is at bare-minimum operating level in terms of the prescribed level of mandatory stockholding that state enterprises are meant to hold,” Muller said during the Gulf Intelligence podcast.
“All eyes are on what happens in China after the Chinese New Year because there’s a feeling that some restocking will be required,” he added.
“If you look at the spot behavior at the very front of the market it doesn’t look like they’ve had their foot off the pedal. Up until the very last day before Chinese New Year, the state-owned enterprises seemed interested in buying crude at these prices,” Muller said.
What is more, according to Vitol’s executive, China doesn’t appear to be as sensitive to high oil prices as South Asian nations are.
Overall, the front futures price structure is so backwardated that “the market is telling you: be careful, don’t be short because you are one disruption, one refinery wobble away from markets getting even stronger,” Muller noted.
Apart from the potential Chinese restocking after the Chinese New Year festivities end this week, the most recent positioning of the money managers shows there is still room for more long positioning in oil, according to Vitol and analysts.
In the latest reporting week to February 1, speculators were net sellers of crude oil for the third week. The net long—the difference between bullish and bearish bets—in WTI rose by 6,400 lots, but the Brent net-long dropped by 13,000 lots in the week to February 1.
Thus, the combined net long in the two most traded benchmarks was slightly reduced to 533,000 lots, which is some 200,000 lots below the June peak when prices traded 25 percent lower, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Sunday.
“Both WTI and Brent reached new cycle highs above $90 with rising front-month spreads signaling increased tightness. The combination of tight supply, inflation, the weaker dollar and the current turmoil in stocks and bonds are likely to have driven increased demand from paper investors, with asset managers and speculators at large funds seeking a haven to help weather the storm currently blowing across their traditional investment portfolios,” Hansen said in a weekly commodity marketanalysis on Friday.
According to ING strategists Warren Patterson and Wenyu Yao, “The options market is also proving supportive, with sellers of U$100/bbl calls having to hedge their position as the market nears the US$100/bbl level.”
$100 oil is in the cards this year, and it could be reached as soon as the second quarter, according to Bank of America, for example.
Tighter market balances, coupled with shrinking spare production capacity, have made a growing number of investment banks more bullish on oil. Major Wall Street banks, including Goldman Sachs, Bank of America, JP Morgan, and Morgan Stanley, expect prices to hit $100 a barrel as soon as this year.
Paraskova reports for Oilprice.com