Oil Price Calm Might Be Deceptive

One could make a case that oil prices are firmly stuck in the summer doldrums.

That’s what analysts at Standard Chartered noted in a report sent to Rigzone late Tuesday, highlighting that front-month Brent settled at $84.42 per barrel on August 28, which they pointed out was a week on week fall of “just $0.04 per barrel”.

“[This] settlement is in very familiar territory. The intra-day trading range for front-month Brent has contained $84.50 per barrel in 17 of the past 24 trading days, including 10 of the past 11,” the analysts said in the report.

“The apparent attractiveness of a familiar range has been accompanied by a steady drift lower in volatility; 30-day realized annualized Brent volatility was just 19.4 percent at settlement on August 28, the first time it has been below 20 percent since the first week of November 2021,” they added.

Low volatility, limited week on week moves, and intra-day ranges that revisit specific prices might suggest a becalmed market, the analysts stated in the report.

“However, some counter-indicators suggest that the calm might be deceptive,” they added.

“Brent trading volumes over the past week were higher 23 percent year on year and open interest was 19 percent higher year on year,” they continued.

“Price dynamics over the past week have not been symptomatic of just drifting, as there have been some sharp and very rapid corrections, particularly after downside moves,” they went on to state.

The analysts highlighted in the report that moves in Brent below $82 per barrel on both August 24 and August 25 “were followed by swift rallies of more than $1.50 per barrel, as significant volumes came into the market to buy on dips caused by cross-asset macro headlines”.

“In our view the market is not trading in a way that suggests much conviction in substantial, sustainable downside,” the analysts said in the report.

“Further, low volatility coupled with difficulty in sustaining downwards momentum often signals an impending upside break,” they added.

Standard Chartered projects that the ICE Brent oil price will average $91 per barrel in 2023, $98 per barrel in 2024, and $109 per barrel in 2025, according to the report.

The report shows that the company sees the commodity averaging $93 per barrel in the fourth quarter, $92 per barrel in the first quarter of 2024, $94 per barrel in the second quarter, $98 per barrel in the third quarter, and $106 per barrel in the fourth quarter.

Neutral Stance

In an oil industry report sent to Rigzone earlier on Tuesday, Macquarie strategists said they were “starting to pivot to a neutral stance as we approach the beginning of fall turnaround season”.

“In recent weeks, increasing runs have supported global stock draws. In the U.S., higher runs helped draw crude stocks to their lowest level since January,” the strategists noted in the report.

“This past month, OPEC+ voluntary reductions from the KSA and Russia have appeared to meet expectations. However, we are still cautious on free riding from other members,” they added.

“For September, Russia is expected to increase exports by 200,000 barrels per day while the KSA has pledged to maintain its one million barrel per day unilateral cut. We forecast a correction in 4Q23/1Q24 as a result of sweet production growth in the U.S., N. Sea, and waning OPEC+ compliance,” they went on to state.

In the report, the strategists said China continues to drive the macro narrative, “potentially capping crude price as parts of the physical markets tighten”.

They also outlined that both WTI and Brent speculative length fell over the last week. WTI decreased by 5.3K and Brent fell by 35.7K, according to the report.

“WTI speculator length maintained its downward trajectory that began the previous week led by an increase in short positioning with a long/short ratio move of 3.30 to 3.06. Brent demonstrated a sizeable decrease in length driven by a larger loss of longs than increase in shorts,” the analysts said in the report.

“Commercial length saw the largest increase since May with Brent and WTI rising by a combined 56K contracts, perhaps due to an acceleration of refinery hedging programs,” they added.

Brent closed at $72.26 per barrel on June 27 before rising up to close at $87.55 per barrel on August 9. It then closed below $84 per barrel on several occasions before increasing to close at $85.86 per barrel on August 30.

At the time of writing, Brent is trading at $85.90 per barrel.

To contact the author, email andreas.exarheas@rigzone.com