Brent crude was trading some 5% higher on Monday, recouping part of the more than 7% loss in the first three months of this year. The rally also took the gains from its recent low in mid-March to some 15%.
We have continued to maintain a positive price outlook for oil, forecasting Brent crude to reach USD 100/bbl by June, as fundamentals support a tightening of the oil market.
The recent fall in oil prices was driven by financial investors. In the two weeks after the collapse of Silicon Valley Bank, non-commercial accounts slashed their net length in aggregated Brent and WTI futures and options holding by more than 168,000 contracts, leading to the lowest level of net long oil positions since 2011 when the combined data was first made available. The liquidation by financial investors during the period was also the sixth-largest since 2011, as financial institutions looked to protect against the price downside risks of options they had sold to oil producers amid the banking sector turmoil.
Chinese crude imports are set to be higher amid the country’s recovery. China’s crude imports were strong in March, and the latest PMI readings reinforce our expectations for a solid economy recovery backed by strong consumption and resilient investment this year. We see upside risks to China’s official GDP growth target for 2023 of “around 5%” as the latest housing sales data point to much smaller drag from the housing market. Overall, we forecast Chinese oil demand to rise by 0.8mbpd this year, bringing global oil demand to record levels above 103mbpd in the second half.
Russian output should stay limited amid a tight market. While the pledged production cut by Russia has not led to a visible drop in Russian exports so far, we continue to anticipate a decline, especially as the country said it will keep its output at the current reduced level. Separately, while Iraq’s federal government and the Kurdistan Regional Government (KRG) have reached an initial agreement to restart northern oil exports this week, some 500,000bpd of oil output have been lost since 25 March. US oil inventories have also continued to decline.
So, we continue to rate oil as most preferred in our global strategy, as part of our positive outlook for commodities overall. We see opportunities in longer-dated Brent oil contracts or in selling Brent’s downside price risk over the next six months. Investors with higher risk appetite can also gain exposure through Brent Crude’s first generation indices to benefit from solid roll returns on top of the expected spot appreciation.
Main contributors - Mark Haefele, Daisy Tseng, Vincent Heaney, Giovanni Staunovo
Content is a product of the Chief Investment Office (CIO).
Original report - Oil market refocuses on fundamental tightness, 3 April 2023.
