March 28, 2023 [OilPrice.com] – Brent oil prices briefly slumped to $70 per barrel on Monday as fears of a recession and a wider banking crisis roiled markets and sent speculators fleeing riskier assets.
By Wednesday, Brent Crude had bounced back to $75 a barrel, and WTI Crude had returned to above $70 per barrel.
Yet the 10% slide in oil prices in the past two weeks has had analysts wondering whether $70 was the bottom for oil prices this year. Will banking and economic jitters drive further declines to below $70, or will China’s rebound and the recovery of jet fuel demand shift the market focus onto fundamentals and away from fears of a slowdown in developed economies?
Further Downside?
Major banks – including Barclays, ING, and Goldman Sachs – have slashed their oil price forecasts for this year following the plunge in prices, but they still expect oil prices to average more than $80 per barrel, and even over $90, in 2023. The world’s biggest physical traders of oil expect a rebound in prices led by China. Some said this week that commodity markets are likely to be spared from the banking sector meltdown and avoid a collapse in demand and prices like in the 2008-2009 financial crisis.
But others see further downside to prices.
“[Given] the fact oil prices had been trending lower for months, their breakdown last week from a multiweek consolidation pattern suggests there may be more downside potential in oil prices,” Fawad Razaqzada of financial services firm StoneX told Energy Intelligence this week.
The banking sector crisis will only add to the concerns about the economy with the rate hikes from the Fed, which announced a 0.25-percentage point hike on Wednesday and signaled the increases are nearing an end, some analysts say.
“Prices have a good chance to move higher”
However, top oil trading houses and investment and hedge funds expect oil prices to rebound from the speculator-driven slump this month and move further up in the summer and the second half of the year as China continues to reopen and the driving season approaches.
“Prices have a good chance to move higher,” Gunvor Group’s chief executive Torbjörn Törnqvist said at the FT Commodities Global Summit this week, as carried by The Wall Street Journal.
China’s rising demand will offset stagnant consumption elsewhere, Törnqvist noted.
Russell Hardy, CEO at the world’s biggest independent trader, Vitol, said, “As we go through the second quarter, we’re expecting a pretty significant rebound in aviation demand, and obviously, summer is always a period of greater demand for gasoline.”
The oil market will tighten in the second half of this year, with jet fuel demand driving a rebound in consumption, especially in China, Amrita Sen, Director of Research at Energy Aspects, said at the same event this week.
The oil market is set to swing from a supply overhang in the first half of 2023 to a deficit in the latter part of the year as the economic rebound in China will push global oil demand to a record high, the International Energy Agency (IEA) said last week in its monthly report.
“Rebounding air traffic and the release of pent-up Chinese demand dominate the recovery,” the IEA said.
Trafigura’s CEO Jeremy Weir said on the FT summit, referring to oil prices, “Is there much downside from there? I think not.”
Weir pointed to a rebound in air travel in China and an increase in Trafigura’s sales of metals to the country.
Saad Rahim, Chief Economist for Trafigura, doesn’t see the current banking sector jitters posing a risk of spreading to commodities like in 2008.
“Famous last words, but so far it doesn’t feel like we’re in that situation,” Rahim said, as carried by FT.
Hedge Fund Positioning Exacerbated The Price Slide
Following the collapse of two U.S. banks and the near-collapse of Credit Suisse, money managers have liquidated some of the bets on rising oil prices. The re-positioning of fund managers has contributed to the 10% plunge in oil prices in the past two weeks.
“The oil market was oversold, and now we are starting to get some signs that demand is stabilizing,” Ed Moya, Senior Market Analyst, The Americas at OANDA, said on Wednesday after market close.
“March mayhem with WTI crude appears to be over, and now price appears poised to recapture the $70 level,” Moya added.
Hedge fund managers slashed their WTI net long – the difference between bullish and bearish bets – by 30% to 124,000 lots in the week to March 14—to a three-year low, Saxo Bank said on Wednesday, commenting on the latest Commitments of Traders reports.
“As the selling accelerated after March 14, we can expect most of the long liquidation and fresh short selling are now done, thereby removing a key source of selling,” the bank’s strategy team said.
