After a massive plunge that sent oil prices down to multi-year lows, the oil market appears to have bottomed out and is starting to move higher on an encouraging note. Over the past two weeks, bearish sentiment and overall risk aversion have cut through asset markets and caused prolonged easing in speculative positions in oil futures. A leading commodities analyst blamed the unusually steep drop on significant selling by banks in response to the gamma effect when the price closes at the concentration level, the producer places about 75 USD/barrel for Brent and 70 USD/barrel for WTI crude.
Fortunately for the bulls, in the current week, oil prices have taken a notable turn, with Brent rising from a two-year low of around $70 a barrel on Monday to 77.20 USD/barrel in intraday trading on Thursday while WTI has recovered from around 63 USD/barrel. barrel to $71.20 in the time frame. That’s a nearly 10% increase in just three days.
And now commodity specialists at Standard Chartered are saying that the path of least resistance for oil prices at this point is higher, not lower. Previously, analysts have said that speculative length easing appears to be complete at this point, thus easing selling pressure, but have warned that prices could retest the lows if the FOMC policy rate hikes more than widely expected by 25 basis points.
Related: Spain urges importers not to sign new LNG deal with Russia
Thankfully, the market successfully extended that wall of worry after Wednesday’s Fed rate hike in line with expectations. The Fed also said the current rate hike cycle is coming to an end.
Quick recovery
The situation is better for the bulls: StanChart expects last week’s gamma effect to reverse course with banks buying back positions, thus underpinning the short-term recovery. In addition, StanChart said oil prices will largely be determined by changes in strategic inventory policies of OPEC and consuming countries.
Specifically, experts have forecast that the current surplus will last until the beginning of the second quarter; however, they expect the rest of the year to be in a moderate deficit.
Source: Standard Chartered Research
StanChart isn’t the only oil bullish here.
Goldman book‘ Jeffrey Currie has acknowledged that the unexpected banking crisis has significantly affected the macroeconomic outlook and weighed on oil prices, calling the situation a “major, scarred event”. However, the analyst expects prices to pick up from here and only lower his end of 2023 target from $100 to $94 a barrel.
According to Currie, fundamentals in the oil market have remained largely unchanged, thus supporting the previous bullish case. He pointed out that key physical metrics, such as refining margin and time difference, remained stable, a positive sign that demand remains strong and is likely to continue to drive growth. push the physical market higher. Currie has also argued that the banking crisis will only have short-term effects but very limited impact in the long-term, “I think the key message here is that we haven’t seen a major shift in fundamentals yet,’ he said..”
However, he warned that the mayhem would lead to a “… The road ahead is longer.”
Andurand Capital hedge fund manager Pierre Andurand is not just a bull but an extreme bull: Andurand has predicted that crude oil will reach $140/barrel by the end of the year. Like Currie, Andrurand argues that the recent oil price crash caused by bank anxiety is purely speculative. Furthermore, he predicts crude oil demand will peak around 2030, but “even if we peak, oil demand won’t drop that fast. We will peak demand towards 110 million bpd and then gradually decrease from there.”
Oil and gas stocks also edged higher along with the commodities they track: energy industry benchmarks, SPDR Fund chooses the energy industry (NYSEARCA:XLE), up 4.1% since the beginning of the week.
After posting record profits for two straight years amid high oil and gas prices, energy sector earnings are expected to decline only slightly this year compared to other market sectors. Late last year, a Moody’s Research Report predicts that industry earnings will be stable overall in 2023, although they will be slightly below the levels achieved by recent peaks. Analysts note that commodity prices have fallen from very high levels in early 2022, but have predicted that prices are likely to remain cyclically strong through 2023. This, combined with growth. modest in volume, will support strong cash flow generation for oil and gas producers. Moody’s estimates that the U.S. energy sector EBITDA for 2023 will come in at $585, in line with a modest 6% drop from 2022 levels.
Valuations in the oil and gas sector also remain low despite two years of strong recovery with many energy and gas stocks trading at a large discount to the market.
By Alex Kimani for Oilprice.com
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