Crude’s Equal and Opposite Reaction

Crude traders continue to remain bearish in 2Q23 despite some positive indicators that would otherwise dictate a bullish market. Fundamentals are providing support but are yielding to news cycles and the rumor mill. Expectations remain in high hope for crude as we turn into the latter half of the year, but traders remain convincingly bearish. Crude is expected to tighten as the year progresses and China’s demand continues to climb out of the pandemic slump. So, what gives?

Portfolio managers are down on crude oil more now than in the last 10 years. To find a bearish market of this nature we would need to go back to 2011. One of the major factors contributing is near-term recession and a slowing economy. Bank failures and a slowing demand coupled with interest rate hikes and inflation are causing major concern in the oil markets. Additionally, the US debt ceiling negotiations are negatively contributing. Both the EIA and OPEC+ have predicted a growing demand and supply tightening, but oil traders have not gone all-in on those analyses.

China’s demand continues to grow back slowly which is reassuring however, demand and economic growth have not kept pace with expectations. Additionally, Russian exports to China have increased as they continue to flood the market, ignoring OPEC+ production cuts, to boost revenue to offset its lower market value. China may very well be increasing storage levels by rebranding Russian oil as a non-sanctioned country’s oil, such as we see Iranian oil being marketed as Iraqi oil. This could prohibit expected future price gains.

In short, the volatility in the oil markets continues to be a trend. As Newton discovered, “For every action there is an Equal and opposite reaction.” Nothing has been truer for the oil markets in 2023.

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