The Case for Higher Oil Prices
It is hard to argue the case for major price falls in oil & fuel in the face of weak supply and such high speculation to the upside. UK Diesel saw prices topping out to an 18 ppl premium to July 2023 lows last week. Traded ULSD Platts contracts rose an eyewatering 4% in intraday trading on Wednesday. With potential further rises forecasted, the need to look at appropriate risk management is fast rising for companies wanting to stick to budgeted rates of their fuels.
Hedge funds were seen to be increasingly investing in the oil market with a strong belief that prices will soon exceed $100 per barrel. This surge in hedge fund activity is adding momentum to an ongoing rally, initially exacerbated by Saudi Arabia and Russia’s production and export reductions by 1,000,000 barrels until year end. In the 2 weeks leading up to September 12th, regulated exchange data showed that net hedge fund long positioning jumped by 137,000 contracts, or 35 percent to an 18-month high of 527,000 contracts. Russia’s decision to ban all diesel exports sent European Diesel Futures rallying 4% in midday trading on Wednesday. While many believe that Russian oil is not making its way into Europe, the procurement of Oil from Russian Oil buying proxy countries such as Saudi Arabia has been a way to sidestep these regulations.
Notable research from Bank of America this week suggested a return to 3-digit Oil Prices by year end, in a note released last week on Tuesday. Speaking on Bloomberg Markets this week, the CEO of US Major Oil Giant Chevron also highlighted the likelihood of returns to $100 oil by year end, further adding to fears by Oil product consumers of higher input costs to their operations.
The Week Ahead
Russia Export Ban Reaction, Chinese Manufacturing Data in Focus
Meanwhile, a series of economic data released in the US and China in recent weeks has signalled stronger performance in the world’s two largest economies and raised forecasts for oil demand. Looking ahead to this week, it is notable to acknowledge JP Morgan’s latest assessment of the Global Oil Market, with analysts forecasting a potential rise to 90-110 USD/bbl., joining Goldman Sachs, who also just raised their forecasts for $100 / bbl. by year end.
While the market digests Russia’s latest Diesel Export ban, the market will be digesting the US Federal Reserve’s comments from last week that rates will stay higher, for longer. Oil saw a temporary dip on the comments last week, snapping a three-week rally in both major Oil Contracts (WTI & Brent Crude).
Looking forward to this week, all eyes will be on China’s manufacturing sector numbers, which are expected to return to expansion in September, and to rise above 50 for the first time since March 2023, according to Goldman Sachs Analysts. Chinese Oil demand increased by 0.3 million barrels per day to 16.3 million bpd last week, due to the gradual increase in demand for jet fuel for international flights.