By John Kemp
LONDON, Aug 14 (Reuters) – Crude oil traders have become progressively less bullish about the outlook for prices in recent weeks as concern over the lingering COVID-19 epidemic and its impact on the economy have trumped output cuts by the OPEC+ group of producers.
In retrospect, the second half of June and first half of July marked the peak of optimism about a rapid drawdown in excess oil stocks and a rise in prices. In the weeks since, positive sentiment has been ebbing away.
In the physical market, dated Brent’s five-week calendar spread peaked in a backwardation – where future prices are lower than current prices – of more than $1 a barrel on July 16 and has since fallen back to only 36 cents, indicating a slower expected drawdown in stocks.
On the futures side, Brent’s six-month spread peaked in a contango – where the price of crude for delivery at a future date is higher than that for prompt delivery – of 48 cents per barrel on June 19 and has since slipped to about $2.33, again signalling that traders expect inventories to remain plentiful.
Brent’s front-month price has continued to climb but the rate of increase has slowed to only 12% over the past two months, down from 104% in the two months to June 24.
In the past month Brent’s spot price has risen by only 5%, suggesting that the earlier rally has run out of momentum (https://tmsnrt.rs/2Y13O9g).
Over the same period, portfolio managers have become less bullish, trimming their net long position in Brent futures and options to 188 million barrels, down from a peak of 214 million on June 30.
Hedge funds and other money managers’ bullish long positions in Brent outnumber bearish short ones by a ratio of 3:1, down from 5:1 at the end of June.
On every price and positioning measure, market sentiment has become neutral or even mildly bearish, having been positive two months ago.
Dated Brent spreads have slipped to the 64th percentile from the 88th. Brent futures spreads are down to the 29th percentile from the 42nd. Hedge fund position ratios are down to the 33rd from the 59th. All are based on long-run measures of 7-20 years.
Much market commentary has remained positive over the past seven or eight weeks, drawing inspiration from the drawdown in U.S. petroleum inventories.
But traders have become more cautious as the resurgent pandemic has complicated efforts to reopen major economies and restart international aviation.
Softening market indicators have coincided with the upsurge in reported coronavirus cases in the United States since the middle of June, hindering efforts to return the economy to normal.
Short-term layoffs and furloughs in the United States and other leading economies are hardening into longer-term unemployment, threatening to prolong the recession.
After a relatively strong post-lockdown surge, U.S. refinery processing rates have merely edged higher over the past six weeks as the improvement in fuel consumption has slowed.
In the United States and elsewhere, downside risks to oil consumption have increased at the same time as OPEC+ is supposed to be starting to taper its production cuts.
Traders have started to price in the likelihood of a longer, more uneven recovery from the unprecedented shock in the second quarter.
The result is a market stuck in the doldrums but starting to look slightly weak on a range of measures.