Oil Markets Are Down, But Downsides Are Limited

WTI and Brent crude prices fell for a third session in a row on Tuesday, and the US benchmark hit its lowest level in more than a year. Front-month Nymex crude for January delivery closed the day down -3.5% at $74.25 a barrel, the lowest in nearly a year. February Brent oil rose -4% to $79.35/barrel. This is the weakest close since January 3. concerns over a broader market selloff and more aggressive monetary tightening by the Federal Reserve overshadowed any upside. New price limit for Russian oil sale.

Oil traders have been eagerly waiting to see how the Russian oil price cap will affect the market, but the measure has yet to affect prices.

Meanwhile, data released on Monday showed that The US ISM service sector index rose slightly and reached 56.5%. 54.4% in October in November, which is “Red flashing signals that the Federal Reserve may keep interest rates higher for longer, increasing the likelihood of a US recession and lower energy consumption,” Stephen Innes, managing partner of SPI Asset Management, told Morningstar. The ISM surveys purchasing and supply managers of non-manufacturing (or service) firms. The services report measures business activity for the overall economy; A value above 50 indicates growth, and a value below 50 indicates contraction.

Bearish Oil Price Sentiments

So, how was the bearish mood in the oil markets?

According to commodity analysts at Standard Chartered, speculative positioning in crude oil has been largely unremarkable through 2022, but has changed in recent weeks. Analysts found that their proprietary crude money manager positioning index, which compares net lengths for the four major New York- and London-based crude contracts relative to open interest and historical norms, is more negative than all other commodities they currently track. StanChart reports that in recent months, crude oil has remained near the bottom of the metals and energy rankings in terms of respectable positive speculative advantage, while gasoline has been near the top.

StanChart’s crude oil index is currently at -70.3, the lowest since mid-April.

2020 (about a week before WTI prices settle into negative territory). Now the index is down

57.4 over the past three weeks, marking the biggest three-week decline since February

2020, just before the temporary collapse of the OPEC+ deal.

Source: Standard Chartered

However, StanChart says the situation this time around is very different from the historical oil price collapses of 2020, which could limit the downside for oil prices. First, analysts note that the fundamentals of the oil market are more supportive this time than at the beginning of 2020; Demand is not about to collapse due to the pandemic and there are currently no price wars by manufacturers.

Experts say that oil prices are subject to the opposite effect of top-to-bottom macro trade, triggering a sell-off with both positive and negative news on the economic front.

According to StanChart, negative US economic indicators are causing oil prices to fall due to recession fears; however, positive data points have a similar effect, ironically, due to the strengthening of the US dollar.

In addition, sentiment was buoyed by hopes that China would reopen, but as the timeframes lengthened, many traders opted to place more bets on metals markets instead.

Fortunately for oil bulls, commodity experts say the new shorts are relatively weak and will be covered soon, which will help oil firm up, although in the short term the market will add to the downside.

Regarding the Russian offshore oil price cap, StanChart predicted that it will have little effect on oil prices. Analysts note that China, India and Turkey are the three main swing countries

Consumers of Russian oil, and none have yet suggested that they would consider marking the limit. Without the participation of these three countries, even if Russia agreed to sell oil on these terms (which it has repeatedly said it would not do), the amount of Russian oil likely to exceed the limit would be small.

The big question here in terms of market impact is whether Russia can transport oil to its main consumers (including providing adequate insurance) without using the EU or other G7 services. StanChart says that after invading Ukraine, Russia acquired a large enough “shadow” tanker fleet that it could use to transport most of the displaced; but analysts note that the insurance aspect is likely to pose serious problems. This has led analysts to predict that Russian crude oil production will decline by 1.44 million barrels per day in 2023 due to a lack of high-quality equipment and lack of access to international service companies over time.

By Alex Kimani for Oilprice.com

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