More bullish bets on oil by traders amid improved economic outlook, optimism over China’s reopening

The oil bulls have been gaining strength from rising demand hopes as China’s economy reopens, accompanied by a softening dollar. PHOTO: REUTERS

SINGAPORE - A recalibrated outlook of the global economy has gained the attention of oil investors who have raised their bets in petroleum futures at the fastest rate in more than two years, a trend that is likely to continue and keep prices well supported over the next few months.

This view helped push prices for the key international crude oil benchmark, Brent, to trade at just over US$88 earlier this week, about US$10 higher off January’s low of around US$78. 

Higher oil prices could potentially translate into higher electricity prices and motor fuel costs for Singapore consumers.

According to international exchange data compiled and published by Reuters, portfolio investors purchased the equivalent of 89 million barrels in the six most important petroleum contracts over the seven days ending on Jan 17.

Purchasing was the fastest since November 2020.

The rise was supported by an increase in crude purchases totalling around 78 million barrels that was supported by an investment in crude-related futures contracts.

Total positions in Brent crude contracts rose to 212 million barrels, up around 35 per cent from volumes purchased in the week ended Jan 10 and the recent low of 89 million barrels recorded on Dec 13, the data showed.

Mr Jorge Montepeque, chief executive of consultancy Global Markets, said the changing sentiment in the outlook of the global economy was largely a result of the full reopening of China.

“As China forgets about Covid-19, movement within and out of the country will spike. Travel will certainly go up, but overall economic efficiency will improve and naturally, oil consumption will increase and products exports from China will decrease,” said the oil industry veteran.

He added: “Europe will benefit from the Chinese reopening. This means that currently, the engine for global growth is China.”

Mr Yaw Yanchong, director of oil research at Refinitiv, a unit of the London Stock Exchange Group, said volatility would remain a mainstay for oil markets.

This means prices would whipsaw from one session to the next, but he maintained that the trajectory of the market at the moment is on the upside.

The oil bulls have been gaining strength from rising demand hopes as China’s economy reopens, while a softening dollar seems to be supporting further upside gains, he said.

The bullish sentiment of investors betting on oil was echoed by finance ministers, economists, fund managers and Wall Street bankers gathering at the World Economic Forum in Davos from Jan 16-20.

In an interview with The Straits Times, Mr Faisal Alibrahim, the Minister of Economy and Planning of Saudi Arabia, the world largest oil exporter, acknowledged the headwinds to the global economy, but said he expected to see an improvement towards the end of the year.

Ms Christine Lagarde, president of the European Central Bank, said the outlook for the economy was a lot better than initially expected, while German Chancellor Olaf Scholz said he was confident that Germany, Europe’s largest economy, would not fall into a recession. 

French central bank chief Francois Villeroy de Galhau said last week that the euro zone was looking more resilient than expected and should avoid a recession in 2023.

This is mainly linked to lower energy prices due to a warmer winter that also saw reduced demand for natural gas for power generation across industry and households in Europe, healthy government stimulus support and the earlier than expected reopening of the Chinese economy, which is widely seen as the catalyst to boost global demand.

Last week, the International Energy Agency (IEA) and the Organisation of the Petroleum Exporting Countries (Opec) said China’s lifting of Covid-19 restrictions should bring global demand to a record high this year. 

The IEA said in its monthly report in January that global oil demand would rise by 1.9 million barrels per day (bpd) to 101.7 million bpd in 2023. Nearly half the gain is coming from China lifting its Covid-19 measures.  

Among the primary factors contributing to consumption growth will be demand for jet fuel, according to the IEA.

Analysts have noted that, given the speed of transmission, the current Covid-19 infection wave is likely to end by late February or early March.

This is likely to stimulate an increase in domestic and international passenger travel by air, in addition to rail and road, driving a large increase in fuel consumption.

Mr J. Y. Lim, an Asian oil market analyst at S&P Global Commodity Insights, said that while jet demand was slow in 2022, this year, it is expected to be the key driver of regional growth due mainly to the easing of travel restrictions in China.

“South-east Asia is likely to gain most from China’s travel revival as they have steered clear of requiring Covid-19 tests before entry as imposed by some countries in the region for Chinese visitors,” he said.

Wall Street bank Morgan Stanley said in a recent research report that the key support for higher oil prices will come from the reopening of China and continued recovery in the global aviation section.

Mr Mukesh Sahdev, senior vice-president and head of downstream and oil trading at energy consultancy Rystad Energy, warned about a potential mismatch between actual jet fuel production growth as compared with actual demand growth.

“The refiners will not be capable of producing enough jet fuel supply in such a short period of time this year. We also note that global inventories of jet fuel supply are low,” he said.

“Jet fuel is a product that cannot be produced in large quantities and then stored for long periods of time. Quality is affected by long periods of supply being in storage tanks owing to tight specifications.”

He added that he was expecting to start seeing visual signs of this mismatch between production and demand moving into the summer of 2023 in the US and Europe. 

He said: “The trading signal is clearly pointing towards to go long on jet fuel.“

Besides highlighting demand for jet fuel, the IEA, in its latest report, also said that on the supply side, markets could see a tightening, particularly if Russian oil supply is reduced under the full impact of sanctions on Moscow.

Mr Henning Gloystein, director of energy, climate and resources at Eurasia Group, noted that these two factors could significantly tighten markets.

“New non-Opec volumes are weighted to the second half of the year, and the growth forecast by the IEA (1.9 million bpd) is heavily dependent on expectations of new US supply, which may not fully materialise. Meanwhile, Opec spare capacity is limited,” he said.

“There’s a noticeable change in sentiment among financial oil traders, who seem to be increasingly taking a bullish mid-term view, based on the notion that China’s oil demand will pick up as most people will have come through Covid-19 infections by the end of the second-quarter, and add to that, Europe seems to be on track of escaping a recession.”

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