Oil prices, already up around 20% this year, could be boosted by China potentially replenishing its inventories and financial investors increasing their long positions, according to Vitol Group.
The world’s biggest independent oil trader said there’s a chance China looks to build up stockpiles following the Lunar New Year holiday.
“I think it’s fair to state that China is at bare-minimum” in terms of the volumes of oil state-owned enterprises need to hold, Mike Muller, Vitol’s head of Asia, said Sunday on a podcast hosted by Dubai-based consultant Gulf Intelligence. “All eyes are on what happens in China after the Chinese New Year. There’s a feeling that some restocking will be required.”
Crude posted a seventh-straight gain last week, with Brent climbing above $93 a barrel. Many traders believe it’s a matter of time before prices reach triple digits. Demand has largely held up in spite of the spread of the omicron variant of the coronavirus, while many major producers are struggling to raise output.
For China, the world’s biggest oil importer, prices aren’t yet high enough to dent consumption, according to Muller.
“It doesn’t look like they’ve had their foot off the pedal,” he said. “Up until the very last day before Chinese New Year, the state owned enterprises seemed interested in buying crude at these prices.”
Still Risk-Off
Hedge funds and other investors could increase their exposure to oil given how tight the market is and with inflation rising globally, according to Vitol. Money managers have raised their net-long positions for crude since mid-December, but to levels still below the average for the past five years, according to data compiled by Bloomberg.
“The market is still relatively risk-off,” Muller said. Positioning is “nowhere near where you’d expect it given some people consider oil to be a good inflation hedge. The fundamental picture on oil is a very resounding thumbs up. Demand is making the headlines and supply is the problem.”
Still, the trade is “not for the fainthearted,” he said, because oil’s implied volatility — a forward-looking measure — is at historic highs.
Muller also said:
Steep levels of backwardation — a bullish pattern whereby near-term futures are more expensive than later ones — are a signal to oil traders to “be careful, don’t be short.”
“We’re one disruption, one refinery wobble away from markets getting even stronger”
OPEC+’s spare production capacity could fall to levels “considered alarming” later this year or in 2023.
Most analysts and traders have priced in a return of Iranian barrels to the market this year
Saudi Arabian state producer Aramco’s price increases for March were logical given how much more backwardated the market’s become in the past month
“Aramco is saying it can find enough demand in Asia. It looks bullish, but they’ve done what the market expected”