Unwarranted Demand Pessimism Could Lead to a Big Oil Price Rally
- Oil prices fell to their lowest level since July last week.
- Money-manager shorts across the four main Brent and WTI contracts rose w/w by 31.7 mb to 209.5 mb in the latest positioning data.
- Standard Chartered: the current price weakness is a significant undershoot, and oil markets may soon record a big rally comparable to the May bull run.
Last week, oil prices logged a third straight weekly decline, sinking to the lowest level since mid-July as concerns about demand continue to replace the fear of production outages related to the Middle East conflict. Oil markets have been experiencing a shift in sentiment, with a significant decline in speculative buying also putting pressure on prices.
According to commodity analysts at Standard Chartered, the shorts have returned to the oil markets with a vengeance. Money-manager shorts across the four main Brent and WTI contracts rose w/w by 31.7 mb to 209.5 mb in the latest positioning data, while money-manager longs fell by 16.0 mb to 456.4 mb. In contrast, the volume of long positions in crude oil has decreased due to macroeconomic fears overshadowing traditional supply and demand factors. The long-short ratio in the Chicago Mercantile Exchange (CME) WTI contract has fallen to 2.0 in the latest data, a sharp decline from 11.4 six weeks ago.
According to StanChart, concerns about weakening demand stem from confusion about seasonality and the relationship between exports and production. The analysts note that demand for air conditioning in the Middle East is lower now since the northern hemisphere summer is over, which has freed up higher volumes for export. Traders and speculators are [incorrectly] interpreting this increase in export availability as being indicative of higher supply and a loss of producer discipline. However, the analysts say that the scale of the current speculative move in oil is not justified by fundamental data.
For one, India’s oil demand remains robust, climbing 211 kb/d in October to 5.004 million barrels per day (mb/d). Diesel demand was particularly strong, rising 9.3% y/y to 1.88 mb/d, while gasoline demand was up 4.8% y/y to 861kb/d. StanChart’s proprietary demand model shows global demand rising 2.02 mb/d y/y in October and have forecast demand growth will stay above 1.5 mb/d in November, December and January, while 2024 growth is likely to clock in at 1.5 mb/d.
Good news for the oil bulls: StanChart notes that the extreme demand pessimism in the oil market back in May proved to be unfounded, and the undershoot in prices laid the ground for a rally that extended to over USD 25/bbl. The analysts have argued that the current price weakness is also a significant undershoot, and oil markets may soon record a big rally comparable to the May bull run.
India Takes Over From China
The strong demand growth being recorded in India might not be a fluke. Several analysts have predicted that India will replace China as the main driver of global oil demand growth in the near future. A rapidly growing population, which has likely surpassed China’s, is expected to be the main driver of consumption trends in India. Meanwhile, the country’s transition from traditional gasoline and diesel-fueled transport is expected to lag other regions, in sharp contrast to China’s skyrocketing adoption of electric vehicles and clean energy in general.
“India was always going to exceed China in a matter of time in terms of being the global demand growth driver, mainly due to demographic factors like population growth,” Parsley Ong, the head of Asia energy and chemicals research at JPMorgan Chase & Co. in Hong Kong, has told Bloomberg.
China’s adoption of electric vehicles has been lightning fast, a trend that does not bode well for gasoline demand in the world’s biggest car market. EV sales in China nearly doubled to 6.1 million units in 2022, compared with just 48,000 units sold in India, according to BloombergNEF. BNEF has revealed that EVs are already displacing over 1.4 million barrels a day of oil use globally.
On its part, India is in no hurry to ditch traditional fossil fuels. Earlier in the year, India’s coal minister Pralhad Joshi announced that coal will continue to play an important role in the country’s energy sector until at least 2040, referring to the fuel as an affordable source of energy for which demand has yet to peak in India.
"Thus, no transition away from coal is happening in the foreseeable future in India," Joshi said, adding the fuel will continue to play a big role until 2040 and beyond.
However, India is unlikely to replicate the mammoth scale of China’s expansive oil network any time soon, with the latter currently consuming three times as much oil. India’s oil consumption grew by ~255,000 barrels per day (bpd) during the first seven months of the current year, helping to grow total consumption to 135 million metric tons in the first seven months of 2023 compared to 128 million metric tons for last year’s corresponding period. However, that growth clip was considerably slower than 415,000 bpd posted in 2021/22 as economies rebounded from the coronavirus pandemic and lockdowns.