Those returning from a week-long holiday could be forgiven for thinking that excitement has been in short supply across the oil market of late. After all, Brent only managed to gain 51 cts/bbl last week while WTI tacked on 26 cts/bbl. Yet these modest weekly changes bely what was a rollercoaster week for the energy complex. Things got off to negative start with oil prices posting their worst session since March. Both crude markers plunged $5/bbl on Monday as OPEC+ overcame internal divisions and agreed to boost output just as pandemic concerns started to run riot following a global surge in Delta variant infections cases. Simply put, the return of demand-related virus jitters to the forefront of traders’ minds drove oil bulls to the exit.
There are no prizes for guessing the driving force behind this brutal selling frenzy. Such was the intensity of the selloff that it could only have been caused by an intense bout of speculative liquidation. And sure enough, latest data from the CFTC and ICE showed that money managers slashed their bullish positions in the two main crude oil futures contracts in response to the latest OPEC+ deal. Net speculative length in ICE & CME WTI fell by 74 million bbls to a 2021-low of 320 million bbls in the week to July 20. This was the biggest weekly decline since August 2017. Moreover, bullish bets in ICE Brent plunged by 50 million bbls over the same period. In both cases, the decline in speculative length was almost exclusively caused by a liquidation in long positions. Gross longs in WTI shrank by 60 million bbls, the biggest weekly pullback since our records start of 2015. On Brent, long positions declined by 58 million bbls in what was the biggest drop since October 2018. The upshot is that the value of speculative holdings in the two leading crude contracts fell to $39 billion from $53 billion in the prior week.
That being said, the bearish onslaught did not last long. Monday’s selloff proved short-lived as bargain hunters ploughed back in to buy the dip. Crude surplus jitters quickly evaporated amid expectations that demand growth will outstrip new supply through the year-end. Underpinning this supportive narrative were major banks that reiterated their upbeat views. Leading from the front was Goldman Sachs who reaffirmed its near-term $80/bbl oil price forecast. Meanwhile, Morgan Stanley suggested that the oil balance will be tighter in 2H21 than in 1H21. Accordingly, it stuck to its forecast that Brent will likely trade in the mid-to-high $70s over the remainder of the year. And lastly, Bank of America stood by its claim that Brent will hit $100 next year.
By Friday’s close, Brent and WTI capped a remarkable turnaround which saw them more than recoup all of Monday’s losses. Not even the mid-week shock of an unexpected uptick in US crude stocks could derail the relief rally. EIA data showed domestic crude inventories rose for the first time since May, but this bearish hit was tempered by supportive global supply and demand dynamics.
Going forward, the oil market should continue to experience a significant deficit in terms of supply versus demand. As much as this will keep a floor under prices, that is not to say that they will rally strongly from current levels. This is because pandemic-fuelled demand fears have not completely lost their grip on market sentiment. Uncertainties surrounding the Delta variant are set to persist for a while yet.
Set against this backdrop, oil prices will likely continue to gyrate wildly in the coming weeks. This, in turn, should provide a boon for trading volumes. Already last week Brent futures trading averaged more than 100 million bbls a day, a 15% increase in the previous week. Yet despite heavier trade volumes, open interest remains subdued. As first noted by PVM Brent futures desk kingpin and fellow Land Rover enthusiast John Evans, holdings of ICE Brent contracts have dropped by nearly 400,000 since the high in February. The last time overall open interest was this low was back in September 2020 during which we had a sustained sideways period in flat price. Either way, what is clear is that oil prices will remain at the mercy of short-term demand weakness from Delta variant concerns and expectations of crude deficits for the foreseeable future.