Psychological factors dampening crude oil rally poised for bullish turnaround

Owing to recessionary fears, lower energy consumption, weaker economic growth and higher shale production, crude oil prices have remained subdued most of this year.

For 2023 so far, both WTI and Brent are approximately 12.4% below where they started.

In addition, bearish factors that weighed on the price included the SPR release and the availability of ‘dark oil’ or sanctioned oil from various countries including Russia, Iran, and Venezuela.

Although other commodities have shown strength, WTI and Brent have not yet come to the party.

Jeff Currie, global head of commodities research at Goldman Sachs believes that this is because both these grades are used heavily in petrochemicals.

The petrochemical market has been weak after heavy plastic purchases during the global health crisis, which is continuing to have a knock-on effect on upstream market prices.

In addition, there was a marked loss of refining capacity during the pandemic, much of which was essential for further processing of WTI and brent.

Turning bullish

However, fundamentals may now be shifting momentum in favour of both WTI and Brent.

Firstly, Currie notes,

As a result, these additional oil supplies are likely to have only had a temporary effect, which can also be said for the SPR release.

Secondly, despite some recessionary concerns among market players, the drawdown in oil inventories of 11 million barrels in the week of 22^nd June 2023, and a further 6 million ending 28^th June 2023, showed a strong switch towards a bullish push.

Bill Perkins, CEO at Skylar Capital Management, added,

The truth is that there has over decades been a chronic shortage of investment in exploration projects and other energy infrastructure, which would suggest that demand will continue to grow even as the temporary surge in supplies is drying up from the market.

As a result, prices will have to continue higher.

Psychological factors

However, both Currie and Perkins note that the market has been suffering from some psychological factors which could soon be turning as well.

Regarding the recent rally in crude oil prices, Currie noted,

Since inventories have fallen, but are not yet dangerously low, Perkins expects market sentiment to shift to being much more bullish once,

Price calls

Currie is of the view that as fundamentals continue to strengthen, the brent market will end the year around USD 86 per barrel.

Countering the idea that further tightening will dampen demand, Perkins said,

He is optimistic that crude oil prices shall climb over the $100 mark.