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Oil Price

Money Managers Are Throwing Their Weight Behind The Oil Price Rally

The prospect of Brent crude reaching $90 per barrel is becoming increasingly realistic, and West Texas Intermediate yesterday touched the highest since 2014. This is fueling a strong bullish sentiment on the oil market.

Hedge funds bought more oil and oil product futures than they sold over seven of the last eight weeks, Reuters' John Kemp reported in his weekly fund-buying column. The data Kemp cited shows that hedge funds, which are big buyers of oil futures, serving as a weathervane for market sentiment at any given point, bought the equivalent of 188 million barrels over the period.

What's perhaps even more telling is that hedge funds increased their bullish positions on oil by 11 million barrels, while new bearish positions only came in at about 1 million barrels, Kemp also said. This means the majority of market players of the fund variety, like investment banks, expect still higher prices.

"The global energy supply crunch continues to show its teeth, as oil prices extend their upward march this week, a result of traders pricing in the ongoing rise in fuel demand – which amid limited supply response is depleting global stockpiles," Reuters quoted Rystad Energy senior oil markets analyst Louise Dickson as saying in another report.

"We're in a really weather-sensitive situation here where we could see natural gas prices really, even, double from here if we get some really cold weather and we could see crude oil prices break through US$100,"  BMO Capital Markets oil and gas equity research director Randy Ollenberg told Bloomberg this week in an interview.

"There could be some pretty significant increases in pricing here if we do get some really cold weather early – so, in December," Ollenberg also said. "We're talking about cold weather in Europe and Asia, that's really where it's critical."

Goldman Sachs, meanwhile, said oil prices could exceed its end-of-year forecast of $90 per barrel of Brent crude. The bank expects crude oil demand to rebound to pre-pandemic levels of around 100 million bpd soon, as economic activity in Asia continues to rebound. What's more, demand could be additionally boosted by the switch from gas to oil at power plants, Goldman analysts said, estimating this boost at around 1 million bpd.

Interestingly enough, this is not what Saudi energy minister Abdulaziz bin Salman sees in the power generation sector. Earlier this week, he told Bloomberg in an interview that the switch from gas to oil is happening at negligible rates, which motivates continued discipline among OPEC+ members with the return of more oil barrels to markets.

This insistence on a disciplined approach helped to push oil prices higher this week as bin Salman clearly indicated that OPEC+ had no plans to respond to calls for bringing more output to the market to rein in prices.

"We don't take things for granted," the official said at an industry event. "We still have Covid, there are still lockdowns," and jet fuel supply remains constricted. "So, we're not yet out of the box and we're not out of the realm of Covid."

With OPEC+ keeping a lid on additional output—in some cases forced by circumstances—and demand seen continuing to increase, Goldman's forecast seems quite realistic, and funds will likely continue buying oil. However, the price rally would add to other inflationary pressures that will sooner or later begin to affect consumer spending.

Just how much sooner or later this would happen remains unclear. One thing that is clear, however, is that the colder the winter in the northern hemisphere, the higher all fossil fuel prices will go. If the winter happens to be milder than feared, then we might see a retreat in the prices of oil, gas, and coal pretty soon.

By Irina Slav for Oilprice.com

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