Oil continued to build on its OPEC-induced gains yesterday. Brent crude hit $83/bbl for the first time in three years as OPEC and its allies resisted pressure to speed up their crude production. The broader energy complex also made further headway into positive territory and included most notably surging gas prices. European and UK gas contracts hit fresh record highs on Tuesday. To put it into context, benchmark gas prices are trading at the equivalent of more than $200/bbl of oil. This should further encourage gas-to-oil switching and exacerbate the current supply deficit in the oil market. An energy crisis is unfolding with winter in the northern hemisphere still to begin and sets the stage for even higher oil prices.

Yet it must be said that the jump in energy prices comes against a backdrop of softening macro fundamentals. Yesterday, a healthcheck on eurozone companies showed growth rates eased in September amid stubborn supply chain problems. Meanwhile, Europe’s deepening energy crunch is bolstering fears of rising inflation and a subsequent pullback in industrial production. Given the number of red flags for the global economic outlook, it comes as no surprise that IMF forecasters are becoming a bit less optimistic. The Washington-based lender revealed yesterday that it expects global economic growth in 2021 to fall slightly below its July forecast of 6%. Its updated growth forecasts are due to be released next week.

Even so, momentum is with the bulls and calls for $85/bbl and $90/bbl thereafter are growing louder. However, at these levels, they risk causing economic damage. The market seems oblivious that if oil prices rise much further, it will become a problem for everyone. In the meantime, oil will take its cues from a looming update concerning US oil inventories. Overnight, the API set a bearish tone after it reported a build of 951,000 bbls in crude stocks in the last week. Products stockpiles also trended higher with gasoline and distillate fuels inventories swelling by 3.68 million bbls and 345,000 bbls, respectively.

Lively times

September proved to be a spirited month for the oil market. Both crude markers gained around $5/bbl last month amid a brightening demand outlook and disruptions to US supplies in the Gulf of Mexico.  And there are no prizes for guessing the driving force behind this uptick in oil prices. Speculators were more active than usual in repositioning their portfolios. Bullish bets on CME WTI rose by 25 million bbls to a two-month high of 298 million bbls in the four weeks to September 28. Over the same period, net speculative length in ICE Brent surged by 55 million to a six-month high of 329 million bbls. In both cases, the rise in NSL was almost exclusively driven by a build-up in length. The upshot is that the number of long positions exceeds gross shorts by a ratio of more than 6:1 on the two major crude futures contracts.

Alongside this flurry of speculative activity was an ongoing bout of repositioning by producers and merchants. Over the summer months, US shale producers abandoned hedges as oil recovered to pre-Covid levels. Consequently, producers and merchants were net long in CME WTI by the end of August for the first time since the start of the pandemic. This trend continued last month as they took further steps to unwind hedges. Net long positions among producers and merchants in the benchmark US crude futures contracts rose to 36 million bbls in the four weeks to September 28.

Clearly, investors and producers have been busy readjusting their holding of crude futures contracts. And these changes were conducive to an upswing in trading activity. Exchange data for September shows that CME WTI average daily volumes (ADV) stood at 954 million bbls, up 3% from the previous month. All the while, the jump was even more pronounced on the European crude benchmark. ICE Brent ADV reached 935 million bbls last month, an increase of 11% on August.

And it’s a similar story so far this month. The onset of October has seen a flurry in trading activity on the back of a perky price performance. ICE Brent ADV averaged more than 900 million bbls in the past two trading sessions. Looking ahead, trading volumes should be supported by a host of price-moving catalysts. They include persistent inflationary pressures, Fed policy tightening, a potential surge in winter Covid cases and concerns about lower growth and energy shortages in Europe. And then there is the possibility of an OPEC+ surprise when they gather this time next month. In short, expect the year-end period to be anything but quiet.