Why Oil May Regain Upward Momentum

Oil markets continue to be lackluster compared with the strength displayed by metals and gas markets.
StanChart has predicted that the bearish sentiment coupled with low market volatility are likely to persist until OPEC+ announces its new policy.
Experts have predicted that positive developments by OPEC+ could trigger another oil price rally.

Dynamics in the global oil markets have shown little change over the past couple of weeks with pessimism still high and hedge funds still leaning towards the short side of the market. Over the past week, Brent prices remained range-bound in the $83.45-83.60/bbl range with the prolonged sideways price movement pushing volatility lower.

The realized annualized 30-trading-day front-month Brent volatility clocked in at just 16.9% at settlement on 20 May, a 2.1 ppt w/w reduction while the 10-trading-day volatility measure came in 7.4 ppt w/w lower at just 12.5%. Front-month Brent settled at $83.71/bbl on 20 May, good for a 0.35/bbl w/w increase but considerably lower than the $1.44/bbl increase predicted by Standard Chartered’s machine-learning oil price modeling tool, SCORPIO.

Oil markets continue to be lackluster compared with the strength displayed by metals and gas markets. StanChart has predicted that the bearish sentiment coupled with low market volatility are likely to persist until OPEC+ announces its new policy during its next meeting scheduled for early June. However, StanChart notes that the exact timing of that unilateral announcement is uncertain because voluntary cuts are outside the scope of the OPEC+ ministerial meeting. The experts have predicted that positive developments by OPEC+ could trigger another oil price rally.

Related: Oil Prices Maintain Losing Streak on Inflation Confusion

In contrast to oil markets, natural gas markets have turned much more positive in recent weeks thanks in large part to improved supply/demand balances. Henry Hub gas prices are up 55.2% over the past 30 days to $2.78/MMBtu while TFF gas has jumped 42.0% from its February lows to change hands at €34.6/MWh. An early heatwave in Texas has helped make U.S. natural gas

the strongest of the major commodities for a second successive week while the positive sentiment in Europe’s gas markets is being driven by concerns about prolonged maintenance outages in Norway, with the Troll field and Kollsnes processing plant still offline.

Pipeline gas supplies to Europe hit a low of 178.9 mcm/day on Tuesday, the lowest since September while the previously huge inventory buildup has slowed down.

The latest data by Gas Infrastructure Europe (GIE) shows that EU gas inventories stood at 77.88 billion cubic meters (bcm), good for a 2.11 bcm y/y increase. However, it’s important to note that whereas inventories are still 16.83 bcm above the five-year average, that surplus is being steadily eroded, having fallen on 32 of the past 34 days for a cumulative decrease of 5.5 bcm over the timeframe. Last week, the continent’s gas inventories increased by 2.28 bcm,

lagging the 2.61 bcm increase over the same period last year and the five-year average

of 2.67 bcm. The muted pace of inventory increases coupled with evidence of strong LNG demand in Asia have been supporting the ongoing natural gas rally.

However, it’s going to be interesting to see if the gas rally will hold, with predictions that Europe’s gas flows will gradually return to normal by the end of May. Meanwhile, warmer weather forecast until the end of May has dampened gas demand, resulting in European gas storage facilities surpassing 67% capacity.

Energy Stocks Giving Up Gains

The end of the early-year oil price rally has forced energy stocks to give up some gains. The sector has lost 5% over the past six weeks bringing its gains in the year-to-date to 11.46%, slightly below the 11.56% return by the S&P 500. The energy sector has slipped several spots in sector rankings and is now the 5th best-performing sector behind Communication Services (21.32%), Information Technology (16.60%), Utilities(14.51%) and Financials (11.80%). Only the Real Estate sector is in the red with a -4.21% return so far in the current year.

That said, Wall Street largely remains bullish on oil and gas stocks. A week ago, Oppenheimer Asset Management revealed it holds a favorable outlook on the equities market, especially the Energy and Consumer Discretionary sector.

“We remain positive on equities” as “92% (459 firms) of the companies in the S&P 500 index having reported Q1 results, earnings are exceeding expectations. Profits are up 5.5% overall on the back of 3.8% revenue growth,” Oppenheimer stated in an investor note. “Eight of the 11 sectors are showing positive earnings growth, with six up at double digit rates. These include communication services (+42%), consumer discretionary (+39%), utilities (+31%), information technology (+14%), financials (+11%) and real estate (+11%),” the investment firm added.

Despite posting another disappointing earnings season, Oppenheimer has indicated that Energy likely has further upside though not necessarily in a straight line.

Meanwhile, we recently highlighted that oil and gas stocks are likely to continue outperforming the market regardless of whether Biden or Trump ascends into the Oval Office come 2025, though clean energy investments could face considerable risk if Trump wins.

By Alex Kimani for Oilprice.com