Monetary Forces Are Dragging Down Brent Oil Prices

Monetary Forces Are Dragging Down Brent Oil Prices
'Macro weakness has kept dragging Brent crude prices lower'.
Image by Dmytro Lastovych via iStock

Monetary forces are dragging down Brent crude prices, BofA Global Research stated in a new report, which revealed that the company has cut its average Brent price forecast for 2023.

“Since we last updated our forecasts in February, Brent crude prices have fallen with regional U.S. bank shares in March only to recover in April as OPEC+ announced a big production cut,” BofA Global Research analysts stated in the report.

“Yet macro weakness has kept dragging Brent crude prices lower as concerns mounted over the health of the financial sector,” the analysts added.

“While central banks continue to overcorrect for their last policy mistake (high inflation), oil is rushing to anticipate disinflation and a U.S. recession driven by bank failures and tighter lending conditions,” the analysts continued.

“On top of that, U.S. debt ceiling tensions risk further exacerbating these negative macro headwinds, with credit default swaps (CDS) on U.S. Treasuries now trading at the highest levels since 2009,” the analysts went on to note.

In the report, BofA Global Research analysts stated that OPEC+ seems committed to cut oil output further if the need arises. They also said in the report that lower oil prices should incentivize demand at a time China’s economy is showing signs of a recovery.

“At any rate, tighter money tends to precede falling inflation by a year or two. Continued bank failures risk triggering a credit contraction that drags demand down and commodity prices lower,” the analysts warned in the report.

“Should small U.S. businesses stop hiring in 2H23 as credit shrinks, gasoline demand could suffer and oil would lose some of its core strength. Fundamentally, following a robust period of backwardation in 2022, oil timespreads have weakened in 2023 on rising oil inventories,” the analysts added.

2023 BofA Brent Forecast

In the report, the BofA Global Research analysts revealed that they had revised down their global oil consumption growth expectations to 1.2 million barrels per day and one million barrels per day in 2023 and 2024, respectively. The analysts stated in the report that this cut is driven by an expected OECD demand contraction of 0.4 million barrels per day and 0.2 million barrels per day this year and next year.

“But even with a weaker demand outlook, we project oil market deficits of around one million barrels per day for 2H23 and 0.4 million barrels per day for 2024, lending support to Brent crude oil prices,” the analysts said in the report.

“Admittedly, these deficits could grow wider if OPEC+ chooses to deepen its production cuts by another 0.5 million barrels per day or one million barrels per day,” the analysts added.

“With negative macro trends poised to amplify demand weakness ahead, we cut our average Brent crude oil price forecast to $80 per barrel in 2023. Even then, we leave our 2024 Brent crude oil forecast at $90 per barrel because we believe OECD demand will eventually improve while OPEC+ will likely keep proactively and pre-emptively managing supply,” the analysts continued.

Excessive Swings

In a separate report sent to Rigzone this week, analysts at Standard Chartered said they think speculative swings have become excessive relative to underlying news flow and fundamental data.

“Whether the tendency for speculators to swing sharply in the same direction is due to an over-reliance on similar algorithms or similar analysts is a moot point - the result has been unnecessary volatility, in our view,” the analysts said.

In the report, the Standard Chartered analysts noted that the Silicon Valley Bank (SVB) collapse caused a record move to the short side in oil but added that the latest swing is of a similar magnitude.

“One of the most surprising features of the collapse of SVB in March was that it led to the fastest-ever move to the short side in oil markets. The net money-manager position across the four main Brent and WTI futures contracts became shorter by 228.9 million barrels (mb) in just two weeks, exceeding even the rate of net selling at the start of the Covid pandemic,” the analysts said in the report.

“The speculative move towards the short side over two weeks after the SVB collapse was more than six times larger than those after the collapses of Bear Stearns and Lehman Brothers in 2008. Most of the post-SVB short selling was reversed after the April 2 decision of some OPEC+ members to make voluntary output cuts, however, it has now resumed apace,” the analysts added.

“The latest positioning data shows a 184.6 mb change in the net speculative position over two weeks. Over the past five years, more net selling occurred only at the start of the pandemic and after the SVB collapse,” the analysts went on to note.

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