Oil prices have risen over the past four weeks, albeit hesitantly and unevenly, and traders have not been able to convince themselves of a stable trend. But as the optimistic signs for oil multiply, traders, despite some caution, are beginning to seize the opportunity.
Bloomberg reported this week that speculators have increased their long positions in crude oil, with the net number reaching nearly 196,000 lots this week on expectations of stronger demand for crude in the second half of the year.
In fact, the first half of the year was largely disappointing, especially in China, where imports fell short of analysts’ expectations. However, some analysts believe that the second half of the year will bring stronger oil demand, especially in the US, where it is peak driving season and early signs of positive demand are indeed pointing. AAA predicted that the Fourth of July weekend this year would see record travel volumes, especially for road trips.
Currently, oil prices are being supported by summer temperatures, which Reuters says could pose a challenge for Gulf Coast refineries as excessive heat could cause malfunctions and equipment damage. Of course, all of this is based on often-diverging forecasts and does not take into account black swan events, including the unpredictable weather during hurricane season. Forecasts are calling for up to seven major hurricanes this year; however, it is worth noting that last year’s forecast was also pretty dire, only it never came to pass as the hurricane season was rather weak overall.
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In addition to these regional and seasonal factors, oil bulls also seem to be inspired by the ongoing war in the Middle East. Despite numerous attempts by mediators to reach some sort of ceasefire, fighting continues with no end in sight. This means that the possibility of oil supply disruption in the largest exporting region remains, affecting daily price changes to varying degrees.
However, the main reason for the return of bullish sentiment is fundamentally the expectation of stronger oil demand in the second half of the year. This could be based on weaker than expected crude imports from China, with hopes that the first half of the year was not indicative of import trends in the second half of the year. However, these hopes may be dashed, with Bloomberg reporting that the number of tankers heading to Chinese ports has fallen to its lowest level in two years.
As the publication reported earlier this month, only 86 tankers said they were heading to China in the next three months, compared to five fewer in the first week of July. However, it is worth noting that Bloomberg also reported in April that the number of tankers heading to China had risen to the highest level in a year. However, this did not help actual imports in the first half of the year meet analysts’ expectations.
Some seem to expect OPEC+ to start increasing production later this year, which would be a bearish signal for oil traders. But here’s a helpful reminder of what OPEC+ has actually said about production growth: They would only reverse cuts if market conditions are right. Market conditions don’t seem very conducive to reversing the production cuts that have kept OPEC+ supply under control, leading some analysts to predict a shortage – because demand in China may not have been sufficient, but global demand is strong.
A major reason for this is the blockade of the Houthi rebels in the Red Sea, which forces ships to take the longer route between Europe and Asia around Africa. According to Vitol, which made the estimate back in March, this has increased global oil demand by around 100,000 barrels a day.
Another reason is the possibility of underestimating the strength of demand outside China. Last year, oil demand in Asia as a whole rose 5%, offsetting smaller declines in Europe and the US. This year is no different, unless, of course, rising prices become a barrier to purchase. In short, it is business as usual in the cyclical oil industry.
By Irina Slav for Oilprice.com
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