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Oil market torpor sends investors to other products: Kemp

International petroleum markets have ended up being calm again after massive interruptions brought on by the coronavirus pandemic, Russia's invasion of Ukraine, and the sanctions imposed in response by the United States and its allies.

Production and consumption are growing at similar rates; inventories are near normal; prices are close to typical when adjusted for inflation; and volatility is low-- all signs the market has found a balance after a tempestuous couple of years.

With a comfy production-consumption balance, hedge funds and other speculators have actually scaled back oil positions to redeploy capital to more interesting markets in power, gas, metals and soft commodities.

It marks a sharp contrast to the start of the year, when most forecasters expected stocks of crude and fuels to deplete as OPEC+ extended production restraint and the significant economies emerged from a downturn in 2022/23.

Chartbook: Oil costs and inventories

However the anticipated drawdown has not materialised as more powerful usage development has been satisfied by faster-than-anticipated increases in unrefined output from the United States, Canada, Brazil, Guyana and some OPEC members.

The threat to global fuel products positioned by Ukraine's drone attacks on refineries in Russia, which peaked in the very first quarter of the year, has actually declined after pressure from the United States to alter the targeting program.

In the Middle East, fighting in between Israel, Hamas, Iran and the Houthis has actually not interrupted unrefined production and tanker circulations have actually been effectively re-routed to prevent attacks on shipping in the Red Sea.

CALM AFTER THE STORMS

So far in May, Brent rates have actually been around $83 per barrel, which is precisely in line with the inflation-adjusted average considering that 2000, so it is not sending a strong signal to either producers or customers to alter their behaviour.

Reflecting the marketplace calm, everyday rate moves have actually been uncommonly small, with annualised volatility decreasing to simply 13%, in the fourth percentile for all overlapping durations considering that 1990.

Signalling a well balanced market, U.S. industrial crude stocks are simply 5 million barrels (-1%) listed below the previous ten-year seasonal average and the position has not changed considerably since the start of the year.

Combined U.S. stocks of gasoline, distillate fuel oil and jet fuel are only 14 million barrels (-4%) listed below the ten-year average and the deficit has actually narrowed considering that the start of the year.

The exact same calm has actually therefore settled over markets for refined fuels such as gasoline, diesel and heating oil.

Pump rates for gasoline including taxes have actually averaged $3.73. per gallon in May, just around 20 cents higher than the. inflation-adjusted average because 2000.

List prices for diesel have actually averaged $3.82 this month,. exactly in line with the inflation-adjusted average over the. very same period.

SPECULATORS LEAVE

Unsurprisingly, speculative investors have actually reduced their. positions to deploy money more beneficially somewhere else as they. conclude costs are unlikely to move anywhere in the short-term.

Hedge funds held a combined position across the six the majority of. essential petroleum futures and choices agreements equivalent to. 380 million barrels on May 21, below 685 million barrels six. weeks previously.

The combined position had actually been lowered to only the 16th. percentile for all weeks since 2013 down from the 66th. percentile on April 9.

Similar scaling back appears across all the futures and. choices agreements for crude and fuels as fund managers slash. their direct exposure to focus on more promising markets.

With oil settled into a period of calm, traders' interest. has actually shifted to other energy markets led by gas and power, still. adjusting to the aftermath of Russia's intrusion of Ukraine.

The focus has also moved to industrial metals, where. products have actually been stretched by fast deployment of electric. cars and grid upgrades as part of the transition to a future. energy system.

Associated columns:

- OPEC? likely to extend production cuts in June (May 3,. 2024)

- Oil traders sanguine about threats from Israel-Iran. conflict( April 18, 2024)

- Why the oil market declines to catastrophise( January 17,. 2024)

John Kemp is a market expert. The views revealed. are his own. Follow his commentary on X https://twitter.com/JKempEnergy.

(source: Reuters)