Oil’s recovery, however, was easy to see coming despite oil markets’ notorious uncertainty. And the reason it was easy to see coming was fundamental. Whatever happens in the speculative market, it cannot be ignored that the global supply of oil is limited while the demand is very much alive and still growing. The Financial Times makes this clear. In an article from earlier this week dealing with price declines among commodities, the authors said that “hedge funds have played a central role in recent commodity price declines — selling from long or positive positions in some commodities and often replacing them with bearish bets.” If the big fear of 2020 and 2021 was Covid, this year it has two: Russia’s Vladimir Putin and the recession. And it looks more and more like the latter trumps the former in terms of horror value. The recession talk is all over the news. Central banks have come under fire for tightening monetary policy too quickly, speeding up the recession. It was only a matter of time before the hedge funds decided to play it safe and start selling off. But, and this is the important part, this has nothing to do with fundamentals. Fundamentals are why oil rallied a day after the plunge. How out of touch market price fluctuations are with actual demand and supply is sometimes highlighted recently by Wells Fargo. According to the bank’s investment strategy department, the United States, the world’s largest oil consumer, is already in recession. “There’s the technical part of the recession, but then there’s the significant deterioration in consumption and employment,” Wells Fargo Investment Institute’s senior global market strategist Sameer Samana told Bloomberg this week. “The technical part is the first half of the story and the brunt of unemployment and consumption is the second half,” Samana added. Inflation, according to analysts at Wells Fargo, has turned out to be much faster and wider than initially expected, consumer sentiment has deteriorated as a result and businesses are changing their spending plans. However, oil demand is still strong, as it appears to be around the world, even though some analysts are predicting a decline. According to Citi’s Ed Morse, for example, “Almost everyone has lowered their demand expectations for the year.” Demand “just wasn’t growing on an empirical basis to the extent that people expected,” Morse told Bloomberg TV. Demand may not be picking up as expected – it would be a miracle at these prices – but supply isn’t exactly booming, which likely drove Saudi Arabia’s latest price hike for Asian buyers to near-record levels. Sellers do not tend to raise their prices when they expect a decrease in demand for their products. No wonder, then, that Goldman Sachs, unlike Citi, says oil could still hit $140 a barrel, even with all the recession fears swirling around the market. “$140 is still our base case because, unlike equities, which are forecast assets, commodities have to solve today’s supply-demand mismatch,” Damien Courvalin told CNBC this week of Goldman. These price forecasts, from both Citi and Goldman, do not factor in supply disruptions – the same supply disruptions that just a few months ago, even a month ago, kept the markets captive. Disturbances are expected to come mainly from Russia’s oil exports, but this may have been factored into prices by now, with almost six months still to go before the European Union’s oil embargo comes into effect. Meanwhile, alternatives to this supply for Europe remain few and far between due to the size of Russian oil exports to the continent. This will likely continue to have an upward effect on oil prices, regardless of economic trends. Even if a recession reduces demand for oil, it would take time to destroy real demand as Citi says could push oil to $65 a barrel. Fears of a recession are well-founded. There is no doubt about it. But commodity fundamentals, not only in oil and gas but also in agricultural products and metals, haven’t changed just because hedge funds suddenly started worrying about a recession. They are still tight. And that puts a floor on prices that will stay there as long as supply remains tight. By Irina Slav for Oilprice.com More top reads from Oilprice.com:
