This is why oil prices should drift higher in April - Mar 30

[dan_s]

As I posted here several times time, the big drop in oil prices in mid-March was the result of FEAR of a banking crisis. There were excess LONG positions in the NYMEX futures market for Brent and WTI that had to be closed. Sellers outnumbered Buyers, so WTI declined over 10% in a matter of a few days. Read the article below to learn why the futures market may now be oversold. In the physical world, the global oil market is tight and expected to be under-supplied in just a few months. In the "Real World" oil-based products will soon be rationed by price. Read the article below carefully. I've highlighted a few sentences that are key.
-----------------------------------------------
From OilPrice.com
Will The Oil Price Recovery Last?
By Tsvetana Paraskova - Mar 29, 2023, 5:00 PM CDT

> Brent is rallying back to $80 per barrel this week as a result of easing banking fears.
> For the rest of the year, the markets will watch how China’s oil demand is evolving after the reopening and how the Fed will act in rates policy.
> China’s economic growth could exceed official targets, and consumer mobility and spending could surge after the reopening.

Following a 10% slump in two weeks, oil prices jumped by 5% on Monday as concerns about the banking sector eased and 400,000 bpd of crude exports from Kurdistan were shut in.

The move lower in oil prices this month was driven by broader market jitters amid a liquidity scare in the banking sector, which saw two U.S. banks fold and Swiss giant Credit Suisse taken over by domestic rival UBS. Speculative liquidation of long positions in oil also contributed to the plunge in oil futures prices. < More Sellers than Buyers forces the price of anything to go down.

Going forward, the health of the global banking sector and the economy, as well as the Fed’s interest rate policy, will determine if $70 a barrel Brent was the lowest price for the international benchmark this year, or if oil has a shot at $100 per barrel if the Chinese reopening surprises to the upside.

The collapse of Silicon Valley Bank more than two weeks ago triggered massive selloffs. The oil market was an early victim of the sharp decline as investors fled riskier assets and speculators rushed to close bets on rising oil prices to avoid exposure in case of a global banking crisis and another recession.

Buyers of crude oil futures held a large net long position – the difference between bullish and bearish bets – before the SVB collapse. Brent’s backwardated curve, the decreased volatility since November, and the Chinese reopening had emboldened fund managers to increase their bets on rising oil prices. And when the banking sector scare came, mass liquidation of longs exacerbated the plunge in oil prices.

“These developments help explain the aggressive nature of the selling that followed once support was broken and volatility began spiking towards the 61% level seen currently,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday in comments on the latest commitment of traders report. < On the Monday after the SVB failure, automated trading triggered a massive amount of stop loss orders.

Hedge funds and other money managers sold WTI and Brent at the fastest pace in more than a decade in the two weeks to March 21. The combined net long position in WTI and Brent plunged to a three-year low, with WTI selling particularly hard, which sent the net long position to the lowest since 2016, Hansen noted. The total net long in the petroleum complex has now plummeted by 50% since mid-January when demand from China’s reopening was the market focus, he added.

“The latest data show that most of the gross longs that we saw added over January and February have now been closed out. Given the more neutral spec positioning, this leaves speculators with quite a bit of room to push the market higher,” ING strategists Warren Patterson and Ewa Manthey said on Monday.

“Although, obviously for that, we will need to see a change in sentiment and an easing in concern over recent developments in the banking sector.”

Sentiment Improves?
This week, market sentiment started to improve as concerns about the banking system began to ease, at least for now.

Oil prices jumped by 5% on Monday, with WTI returning above $70 per barrel, amid signs of easing concerns about the global banking sector. This allowed the market to shift focus to a supply concern from Iraq, where a halt to 400,000-bpd of crude exports from the semi-autonomous region of Kurdistan drove prices higher.

WTI surged by 5.1% on Monday, logging the biggest one-day percentage jump since early October last year, per Dow Jones Market Data.

The more balanced speculative positioning of money managers also means that there could be an upside for oil from here, barring another major scare in the banking sector.

Major banks – including Barclays, ING, and Goldman Sachs – have slashed their oil price forecasts for this year following the plunge in prices, but they still expect oil prices to average more than $80 per barrel, and even over $90, in 2023. < Goldman Sachs WTI forecast is $93/bbl in Q4 2023.

The world’s biggest physical traders of oil expect a rebound in prices led by China. Some have also said that commodity markets are likely to be spared from the banking sector meltdown and avoid a collapse in demand and prices like in the 2008-2009 financial crisis.

For the rest of the year, the markets will watch how China’s oil demand is evolving after the reopening and how the Fed will act in rates policy. When it last raised the rates by 0.25 percentage point last week, the Fed said the peak rate is within sight, and markets are already pricing in a cut later this year.

The higher rates could also feed into capital availability for U.S. oil producers in the coming months, which could constrain supply growth from America.

“While economic-dampening monetary policy will impact spending and tighten credit conditions, it will also affect available capital for oil and natural gas development that will take months to recover, resulting in a tighter supply outlook in the second quarter,” Ed Longanecker, president of the Texas Independent Producers & Royalty Owners Association, told Houston Chronicle’s contributor Daniel Graeber.

Meanwhile, China’s economic growth could exceed official targets, and consumer mobility and spending could surge after the reopening to super-charge a renewed increase in energy commodity prices, especially crude oil, Wood Mackenzie said last week.

Market volatility is likely to remain high, but a strong rebound in Chinese oil demand amid constrained supply growth could move oil prices higher later this year.

By Tsvetana Paraskova for Oilprice.com
------------------------------------
MY TAKE:
> $74 is a key resistance point for WTI. A few days of WTI over $74 should set the stage for a move to $80.
> I expect the next IEA "Oil Market Report" (April 12) to confirm that the fundamentals point to oil demand over 104 million barrels per day within six months. As Matt Iak and I discussed Tuesday's webcast, there is not enough oil production capacity available to meet that level of demand.
> When Buyers exceed Sellers guess what happens.
> All of our Sweet 16 Growth Portfolio companies should report profitable Q1 results, even the "gassers".

[dan_s]

Note from Roth MKM analyst

WTI is holding a key technical level of $72 per Bbl this week for the first time in two weeks,
which is critical to allow for more trading upside into the Spring. We think global oil demand
looks rather healthy right now with record demand in India and improving trends in China and
the U.S. of late. We think global oil demand keeps improving into the spring which is likely to
have WTI back above $80 per Bbl by late 2Q23. This should be largely driven by Southeast
Asia as well as typical seasonal improvements after we exit refining maintenance season into
May and summer driving season begins. Henry Hub natural gas prices have continued to
languish of late at around $2.00 per mmbtu, and we think prices are likely to stay weak into
the shoulder season into April. This is likely to cause gas producers to drop more gas rigs
and producers are also likely to consider shut-ins for higher operating cost areas in the Mid-
Continent and Gulf Coast. We may also see production deferrals from some higher rate shale
wells as producers may choose to wait for a better market later this Summer. On the gas
demand side, we think that there will be more coal to gas switching on the power generation
side as well as more natural gas processing to remove NGL's which will boost gas demand
and limit dry gas production. We think these "automatic stabilizers" for natural gas are likely to
have the market back to closer to $3.00 per mmbtu this summer.
Leo Mariani, CFA, Managing Director - lmariani@roth.com

[dan_s]

Go here https://tradingeconomics.com/commodity/crude-oil and run a 6 month chart of WTI.

What you will see is that for the last three months WTI traded in channel with a floor of $74 and ceiling of $81. If WTI can close over $74 this week, it should re-establish the channel again with $74 being a strong support line and open a clear path to $80.

IEA's next Oil Market Report will be very important. If they confirm their global oil supply/demand forecasts, we should see WTI push over $80 quickly.

U.S. refiners should ramp up to over 95% of capacity by the end of April. They will have run hard to meet demand for gasoline and diesel.