Oil & Energy
Bearish Momentum Grows As Traders Remain Bullish On Crude
With the Ukraine crisis on the cusp of entering its third month, oil markets have endured another wave of heightened volatility.
After weeks of intense fighting at the besieged southeastern city, on Thursday, Putin claimed victory at Mariupol despite thousands of soldiers and civilians remaining holed up in a giant steel plant.
With Moscow promising not to storm the hold out, the crisis is likely to transition into a war of attrition with Russian officials hoping for the defenders to surrender after running out of food or ammunition while focus shifts to the Donbas. But trying to read the oil markets at this time is akin to peering at a crystal ball.
Like most other asset classes -especially those that have real economic uses, such as other energy assets, soft and hard metals, for example – crude oil prices have a well-established relationship with volatility, similar to how stocks and bonds react negatively to increased volatility because it means greater uncertainty around cash flows, dividends, coupon payments, and other shareholder returns.
Crude oil tends to react negatively to higher volatility; however, in an environment characterised by geopolitical tensions, crude oil prices continue to broadly follow movements in oil volatility.
Mixed Signals
After recently rebounding from its lowest levels since late February, oil volatility is on the rise again. Oil volatility (as measured by the Cboe’s OVX) is trading at 53.68, with the 5-day correlation between OVX and crude oil prices currently at a weak -0.07 compared to a much stronger negative correlation of -0.67 just a week ago.
The longer-term correlation, however, appears more steady: the 20-day correlation between OVX and crude oil prices remains strongly positive at +0.72vs. +0.79 a week ago.
In other words, short-term investors can expect serious whipsaws in oil prices while the longer-term outlook remains brighter and more consistent.
Unfortunately, the technical charts appear to tell a different story.
Looking at the daily chart from October 2020 to April 2022, bearish momentum is beginning to set back in, with oil prices below their daily 5-, 8-, 13-, and 21-EMA envelope though not yet in bearish sequential order.
Daily MACD is on the verge of dropping below its signal line, while daily Slow Stochastics have failed to reach overbought territory and are turning lower.
This trend suggests that a move back towards recent lows near $94.42 (61.8 per cent Fibonacci extension of the aforementioned measurement) is possible in the near term, which represents a near 10 per cent downside potential to Thursday WTI intraday price of $104 per barrel.
Peering at the weekly chart from March 2008 to April 2022, it is clear that the bullish momentum has stalled. Whereas crude oil prices are back above their weekly 4-, 8-, and 13-EMAs, weekly MACD is on the cusp of issuing a sell signal (albeit still above its signal line) and weekly Slow Stochastics are continuing to trend lower towards their median line.
Traders remain bullish
Despite all these mixed signals, oil traders remain largely bullish.
A good 60.73 per cent of retail traders are net-long, with the longs eclipsing the shorts by a 1.55 to one margin.
And, the longs are coming back.
After falling nearly 8 per cent last week, the number of traders net-long climbed 13.4 per cent on Wednesday, while the number of traders net-short fell 7.8 per cent on the same day and 2.4 per cent lower compared to a week ago.
Perhaps there are more reasons to be bullish than bearish.
First off, U.S. oil and gas futures are growing increasingly bullish, with natural gas futures for settlement in February 2023 trading above $7/MMBtu.
Second, U.S. energy exports have hit record levels as countries across the world continue to work to replace Russian supplies in the wake of the Ukraine crisis
According to data from the U.S. Energy Information Administration (EIA), the United States’ crude and petroleum exports surged to an all-time weekly high of 10.6 million b/d during the week ending April 15, with the country’s exports outweighing its imports by the most ever in government data going back to 1990.
Kimani reports for Oilprice.com
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.
