Over the past two weeks, non-trading accounts have reduced their net length in aggregate Brent and WTI futures contracts as well as their options holdings by approximately 107,000 lots combined, equivalent to 107 million barrels. . Going back to 2011, larger declines only occurred on 38 occasions. The largest two-week decline occurred in March 2020, when the COVID-19 pandemic began to weigh on oil demand and the OPEC+ deal collapsed. Net length is now at the lowest level since November 2020. We have highlighted in previous reports that oil demand concerns due to recession fears, a stronger dollar and the unwinding of the “hedging against oil inflation” triggered the liquidation.
But while demand for oil in OECD countries has been lackluster lately, it has been strong in non-OECD countries, particularly China, India and Mexico. Meanwhile, oil inventories are still at multi-year lows and short-term available spare capacity is expected to fall below 2mbd in August. And following the meeting between US and Saudi leaders over the weekend, we learned that OPEC+ will only open the taps if market conditions warrant.
Preliminary Russian crude export data suggests a further decline in crude exports this month. While Europe has reduced its Russian imports of crude oil and petroleum products from almost 3 mbd in June to zero by the end of the year, we continue to expect a further tightening of the oil market, justifying a rise in oil prices.
Read the original report Crude Oil: Financial Investors in Liquidation Mode July 18, 2022.
Main contributors: Giovanni Staunovo and Wayne Gordon
This content is a product of the Chief Investment Office of UBS.