Last week, we published one of the more bearish articles on the oil price outlook as reviewed by commodity analysts at Standard Chartered. According to the analysts, their proprietary crude oil money-manager positioning index that compares net longs across the four main New York and London-based crude contracts relative to open interest and historical norms is currently more negative than those for all other commodities they track. StanChart says that In recent months, crude oil has remained close to the bottom of the ranking of metals and energy in terms of implied positive speculative preference, while gasoline has been close to the top. StanChart’s crude oil index currently stood at -70.3, the lowest since mid-April 2020 (about a week before WTI prices settled at a negative price). The index had declined by 57.4 over the past three weeks marking the largest three-week fall since February 2020, just before the temporary collapse of the OPEC+ agreement. Well, sentiment in the oil markets has deteriorated, with StanChart now saying their crude oil money-manager positioning index has declined further by 2.7 w/w to a 31-month low of -73.
According to the commodity experts, “Open interest across the four contracts stands at 3,755 million barrels (mb), the lowest since the first week o 2015 and 2,544mb below May 2018’s record-high. Our crude oil positioning index has fallen for four consecutive weeks.”
Oil prices have nearly given up the year’s gain, though energy stocks remain the best-performing class with the sector’s popular benchmark the Energy Select Sector SPDR ETF (NYSEARCA: XLE) having rocketed an impressive 50.1% YTD.
Skewed To Higher Prices
Thankfully for the bulls, StanChart says very little of the latest fall in open interest is due to the active opening of new short positions; rather, it is primarily due to the closing out of existing longs.
“It does not appear to us that speculators have been adopting a new and far more bearish narrative or specific negative views about oil market fundamentals,” StanChrart writes in its latest report.
“Instead, we see the plunge in the index as reflecting the final abandonment of a series of hypotheses that had encouraged speculative longs. These range from a tightening of the market due to pent-up demand and a lack of spare output capacity through to imminent supply gaps when EU sanctions on Russian crude oil became effective, in the interim passing through background noise on super-cycles, predictions of USD 380 per barrel (bbl) oil and a series of incorrect views about OPEC policy.”
As such, StanChart believes that all this closing out of longs is due primarily to the market now abandoning these views, along with traders reducing risky positions before the end of the year.
“For the first time in 2022 no new focal point has emerged to seamlessly continue what has been the dominant ‘rolling-crisis’ narrative, leaving crude oil prices prey to more top-down, macro-led concerns and the associated correction in prices,” StanChart said.
The experts have revealed that closing out of speculative longs has now moved into oil products, mainly driven by weak demand, rising inventories and fewer-than-expected effects from reductions in Russian flows.
StanChart says its money-manager positioning index for heating oil fell 25.3 w/w to -10.5, that for gasoline fell 25.7 w/w to -34.2 while that for gasoil fell 14.8 w/w to -24.4. Overall, the analysts say positioning is now much less distorted than it has been for a while, which is a good thing because short-term risk-reward is now skewed towards higher prices.
Last week, StanChart noted that the situation this time around is very different from what it was during the historic oil price collapse of 2020, despite multiple market gauges sending red flags left, right and center, something that’s likely to limit the downside on oil prices.
For one, the analysts note that oil market fundamentals are far more supportive this time than they were in early 2020; demand is not about to collapse due to a pandemic and no price wars by producers are present at the moment.
The experts say that oil prices are caught in the backwash from top-down macro trades with both positive and negative news on the economic front triggering selloffs.
According to StanChart, negative U.S. economic data points are triggering an oil price selloff due to recessionary fears; however, positive data points are, ironically, having a similar effect due to the strengthening of the U.S. dollar.
Further, sentiment has been buoyed by China’s reopening, but as timescales dragged many traders have preferred to bet more in the metals markets instead. At the same time, the new shorts are relatively weak and will soon be covered, helping to shore up oil prices.