Bullish oil bets edge higher as fundamentals battle with economic concerns

24 Apr 2023

Quantum Commodity Intelligence – Investors increased net long positions on crude and most refined oil products last week, as signs of a tight oil market compete with concerns over the economic outlook in developed countries.

Money managers added around 9 million barrels of ICE Brent long positions in the week to 18 April, according to the latest exchange data, while short positions increased 2 million barrels.

That pushed net long Brent positions up around 3% to a six-week high 253 million barrels.

Traders were similarly cautious on WTI crude, where net long positions edged 4% higher to a fresh nine-month high 192 million barrels.

The outlook for crude remains relatively tight in the near-term, both the IEA and OPEC seeing record demand this year of around 102 million bpd in forecasts released last week.

And having slammed the OPEC+ decision to cut supply from next month, the IEA warned of a “substantial” supply deficit in the second half of 2023.

That was backed up by data released from China that showed March crude imports at their second-highest level on record at 12.3 million bpd, while domestic refineries ran an all-time high 14.9 million bpd.

But concerns over the health of developed economies remain, amid persistent recessionary concerns and the direction of the US Federal Reserve.  

"The weakness in oil is not being driven by current oil market fundamentals but really on fears that demand is going to collapse due to the Fed that will most likely continue in its rate hiking cycle without a pause," said Phil Flynn of The Price Futures Group last week, adding the market was also weighed down after New York Fed president John Williams said credit conditions would likely deteriorate because of the banking crisis in March.

Brent crude shed around 6% last week to $81.66/b by Friday’s settle, the June contract trading around $81.31/b by 10:30 BST London.

Gasoline, diesel

Oil products look increasingly well-supplied at the same time, as record throughput in China translates into higher exports alongside major capacity additions this year in the Middle East and the US.

Europe is meanwhile bracing for the return of around 900,000 bpd of French refining capacity after strikes fizzled out, while a record 3.66 million mt of gasoil is set to hit European shores this month, according to Refinitiv data.

Backwardation has all but disappeared on ICE gasoil, timespreads on May/June contracts at just $2-3/mt in recent sessions, while cracks have sunk to their lowest in 15 months around $15/b over ICE Brent.

Short covering on ICE gasoil likely contributed to a jump in net long contracts, up 5% from the previous week’s 1.5-year low to 13.7 million barrels as of 18 April. 

Bets on ULSD futures sank 19% on the week to 14.1 million barrels of net longs.

Net longs on RBOB gasoline futures climbed 4% to an 11-week high 65 million barrels on a brighter outlook for demand at the outset of the summer driving season.