The reprieve of cheaper oil may be short lived.
That’s according to Rystad Energy’s senior oil market analyst Louise Dickson, who said falling prices indicate the market has not fully realized the potential impact of lost Russian barrels on global supply.
“The oil price correction from $130 per barrel … reflects a number of signals from the market,” Dickson said in a statement sent to Rigzone late Tuesday.
“China oil demand risk is real. It is estimated that a severe lockdown in China could put 0.5 million barrels per day of oil consumption at risk, which would be further compounded by fuel shortages due to inflated energy prices,” Dickson added.
“Trading is getting increasingly volatile and the dependence on algorithmic trading systems can turn a micro signal into a sweeping cascade price impact, an occurrence that is happening with increased frequency amid the fog of war and financial market uncertainty,” Dickson went on to say.
Dickson also noted that the U.S. call to ban Russian oil has so far been unanswered.
“Without Europe pledging to cut back on its nearly four million barrels per day of Russian crude imports, the Russian supply risk that shot oil prices up towards $130 per barrel has been temporarily mollified,” Dickson said.
“U.S. inflation is also in the spotlight, and the expected decision at … [today’s] Fed meeting to raise interest rates has been slowly strengthening the U.S. dollar and putting downward pressure on oil prices,” Dickson added.
“Asia and Russia are already showing jet fuel demand distress as both have seen severe downward trends in aviation since the middle of February, Russia due to sanctions but China due to the pandemic,” Dickson continued.
Market Positioning and Extreme Volatility
In a separate report sent to Rigzone on Tuesday, analysts at Standard Chartered said they think the correction lower in prices tells them more about market positioning and the effect of extreme volatility than it does about changes in fundamentals over the past week.
“The increase in volatility across financial and commodity markets led to a sharp rise in the level of risk held by traders and an associated incentive to close out some positions to reduce risk,” the analysts stated in the report.
“Because oil traders have mostly been positioned with a highly bullish bias in terms of both outright positions and spreads in recent weeks, optimization in a higher-risk environment has mostly involved closing out prompt longs,” the analysts added.
“With speculative shorts being very thin on the ground currently, there have been few natural buyers and the downside has opened up. While the price ranges involved have been extreme, recent price dynamics bear all the hallmarks of a textbook speculative overshoot followed by the correction necessary to reset extreme positioning,” the analysts continued.
In the report, the analysts noted that the irony of the situation is that the dominance among oil traders of the belief that prices could only move higher has led to a position from which market dynamics dictated that in the short-term prices could only go lower.
“Despite the positioning-led price fall, we think the key fundamentals are largely unchanged week on week and are also subject to an unusually high level of uncertainty,” the analysts said.
