After hitting a seven-year high in late October and early November, crude oil prices seemed to have lost momentum, erasing all gains since early October in November.
In addition, the three major institutions, including OPEC, have recently given predictions that the crude oil market will experience moderate oversupply in 2022.
It seems that the “oil price reduction alliance” formed by the United States, Japan, South Korea, India, the United Kingdom and other major oil consuming countries is beginning to show its power, and crude oil prices are about to disappear forever. However, Ryan Fitzmaurice, senior commodities strategist at Rabobank, believes things are far from that simple.
Fund flow has a greater short-term impact than fundamentals
Oil fundamentals have been in the spotlight of late given rising concerns about inflation and political sensitivities at play.
Wall Street News mentioned that the United States will release 50 million barrels of crude oil from the Strategic Petroleum Reserve, Japan plans to release 4.2 million barrels, the United Kingdom will contribute 1.5 million barrels, and other countries are also planning. Bloomberg expects about 60 million barrels of crude oil to be released from the Strategic Petroleum Reserve (SPR) by the end of March. U.S. Energy Undersecretary David Turk believes the move will lower gasoline prices in the near term.
However, Ryan Fitzmaurice found through statistics that the release of SPR has not had a significant impact on crude oil prices so far. Crude oil prices are more related to capital flows.
In the short term, Ryan Fitzmaurice believes that market disagreements on crude oil price trends have little to do with fundamental prospects and more to do with market sentiment and consensus.
In the current commodity futures trading environment, investors need to note that there are a wide range of traders in the crude oil commodity market today, ranging from commercial companies looking to hedge to bloodthirsty speculators. As time goes by, the speculation behavior of these speculators will become more and more systematic and “quantitative”. More and more speculators will establish trading systems that rely heavily on quantitative trading indicators such as trends, momentum, and spreads rather than fundamentals to make trading decisions.
At the same time, all commodity index trading, which had been invisible for many years, made a comeback this year and achieved high returns.
For both of these groups, fundamentals hardly matter. For example, managers of some large multi-asset allocation funds are largely unconcerned with OPEC+’s warning of a modest oversupply of crude oil next year, and it is more important for them to hold diversified assets. Because this move can diversify risk exposure and mitigate the impact of inflation on the portfolio level.
By reviewing the impact of capital flows on oil prices in the first half of this year, Ryan Fitzmaurice believes that capital flows were the most important price driver at that time. In addition, considering the excellent performance of alternative investments this year, Ryan Fitzmaurice believes that these speculative capital will continue to enter the crude oil market in the first half of 2022, pushing up the spot price of crude oil.
Longer term, Ryan Fitzmaurice believes that if calls for a moderate oversupply in the market materialize, the crude oil price curve will fall back next year as inventories build.
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