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      Oil Bulls See Light at the End of the Tunnel

      Oil Bulls See Light at the End of the Tunnel

      1. Oil prices have been climbing hesitantly for four weeks, with traders expanding long positions on crude.
      2. Despite weak Chinese imports in the first half, analysts expect global demand to remain strong, with OPEC+ maintaining production cuts and a Houthi blockade increasing global oil demand.
      3. Last year, oil demand in Asia as a total grew by 5%, offsetting minor declines in Europe and the U.S.

      Oil prices have been climbing for the last four weeks, though the climb has been hesitant, uneven, and has failed to convince traders of a stable trend. But with the bullish signs for oil multiplying, traders are starting to grab the opportunity, despite some hesitancy.

      Bloomberg reported this week that speculators had been expanding their long positions on crude, with the net number reaching almost 196,000 lots this week, on expectations of stronger demand for crude during the second half of the year.

      Indeed, the first half has largely underwhelmed, especially in China, with imports falling short of analyst expectations. Yet some analysts believe the second half of the year would be more robust for oil demand, notably in the United States, where it’s peak driving season and where the first signs for demand are indeed bullish. The AAA forecast that the July 4 weekend this year saw record travel, notably in car travel.

      Right now, oil prices are getting some support from summer temperatures, which, according to Reuters, could present a challenge for Gulf Coast refiners because excess heat could lead to malfunctions and equipment damage. Of course, all this is based on often diverging forecasts and doesn’t account for any black swan events, including unpredictable weather during hurricane season. Forecasts are for up to seven major hurricanes this year; however, it bears noting that last year’s forecast was rather grim, too, only it never materialized, with hurricane season rather weak as a whole.

      In addition to these regional and seasonal factors, oil bulls seem to be drawing inspiration from the continued war in the Middle East. Despite numerous attempts by mediators to secure some form of a ceasefire the fighting continues with no end in sight, meaning the possibility of oil supply disruption in the largest exporting region remains in place, with varying influence over day-to-day price changes.

      Fundamentally, however, the biggest reason for returning bullishness is the expectation of stronger oil demand in the second half of the year. It could be based on the weaker-than-expected Chinese imports of crude, with hopes the first half was not an indication of import trends in the second half. These hopes may get dashed, however, as Bloomberg reports that the number of tankers bound for Chinese ports has declined to the lowest in two years.

      There were only 86 tankers that have indicated their destination as China over the next three months, the publication reported earlier this month, down by five over the first week of July. It is worth noting, however, that in April, Bloomberg also reported that the number of tankers bound for China had jumped to the highest in a year, but that did not help actual imports during the first half live up to analyst expectations.

      Some appear to expect OPEC+ to start boosting production this year, which would be a bearish signal for oil traders, but here’s a helpful reminder of what OPEC+ actually said about production growth: they would only roll back the cuts if the market conditions are suitable. The market conditions do not appear to be very suitable for any rollbacks in the production cuts that have kept a lid on OPEC+ supply, prompting some analysts to predict a shortage—because demand in China may have underwhelmed, but globally, demand is strong.

      One key reason for this is what amounts to a Red Sea Houthi blockade, which has forced ships to go around the longer route between Europe and Asia, around Africa. This has added around 100,000 barrels daily to global oil demand, according to Vitol, which made the estimate back in March.

      Another reason is the potential for underestimation in demand strength outside China. Last year, oil demand in Asia as a total grew by 5%, offsetting minor declines in Europe and the U.S. This year does not look any different, unless rising prices turn into an obstacle for buying, of course. In short, it’s business as usual in the cyclical oil industry.

      By Irina Slav for Oilprice.com