LONDON (Reuters) – Crude oil prices fell after a brief surge sparked by unexpected production cuts announced on April 2 by Saudi Arabia and other OPEC+ members.
Near-term Brent futures closed at $81 a barrel on April 25 after hitting a high of $87 on April 12, before hitting a recent low on March 17. is still up from just $73.
Adjusted for inflation, the price has been in the 41st percentile for every month since 2000, down from the 47th percentile high two weeks ago, but still up from the 33rd percentile in March.
In effect, prices fell nearly 30% from the same month last year as concerns abated that Russia’s invasion of Ukraine and the sanctions imposed in response would disrupt global supplies.
Instead, real prices are under pressure from concerns about slowing growth and rising interest rates, with the decline coinciding with a severe cyclical recession.
As traders became more confident in the continued availability of crude oil, Brent’s six-month calendar spread fell to a reversed $2.40 per barrel (all trading days since 1990 at the 77th percentile).
The spread has narrowed from its backwardation of $3.99 (92nd percentile) on April 12, but is still slightly higher than its $1.13 (59th percentile) on March 20.
Futures prices show the market to be slightly weaker than usual, while spreads show the opposite. This is likely due to the current weakness in consumption, which is expected to pick up in the second half of 2023.
But prices and spreads are in the middle of their historical range, changing little from before the cuts were announced by the Russian-led Organization of Petroleum Exporting Countries, a group known as OPEC+, and other large producers. .
Chart book: Brent price and spread
This does not mean that the reduction had no impact. Without them, prices and spreads could have fallen further as traders focused on a weakening economic cycle.
But in the big picture, the unexpected price cuts of over 1 million barrels per day were quickly absorbed and had only a minor impact on actual price levels.
Volatility spiked briefly after the announcement but has since receded to near its long-term average, indicating that most of the financial impact has been absorbed.
Given the large withdrawal of barrels from the market in the short term, the physical market had a more lasting impact.
The 5-week Brent spread remains backwardated at $1.18 (86th percentile) from the 60 cents (20th percentile) contango on March 17th.
Bears routing
If one of the objectives of Saudi Arabia and its OPEC+ allies was to force bearish hedge funds out of the oil market, it appears to have succeeded.
Even before the cut was announced, the total number of short positions of hedge funds and other money managers at Brent and WTI rose from a high of 204 million barrels on March 21 to 100 million by March 28. It had fallen to 59 million barrels.
After the cut, however, the number of short positions fell further, to just 78 million barrels by April 11, close to the lowest since 2010 of just 65 million barrels.
Bearish money runaway has pushed the ratio of bullish long to bearish short positions in oil from 2.11:1 (8th percentile) on March 21 to 6.62:1 (82nd percentile every week since 2013) rose to
In the past, Saudi Arabia’s oil minister has described unexpected production cuts intended to discourage short selling by hedge funds as “painful”.
This effectively protects producers from sharp price declines, similar to the “Greenspan put” that characterized the US Central Bank’s monetary policy under former Federal Reserve Board member Alan Greenspan. It is also an “OPEC + put” option for the purpose of
But the cut has so far drawn a number of new bulls into the market, with the fund’s long positions rising by a relatively modest 90 million barrels in the same four weeks.
For now, the hedge fund community’s bullishness is tempered by concerns about the relatively poor macroeconomic outlook.
Related columns:
– Oil prices stall as short-covering rally completes (17 Apr 2023)
– Surprise, squeeze your shorts, reveal your taste (April 3, 2023)
~Oil Markets Completely Absorb the Impact of Russia’s Invasion of Ukraine (March 9, 2023)
John Kemp is a market analyst at Reuters.the views expressed are his own
Editing by Paul Simao
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