In a report sent to Rigzone late Tuesday by Standard Chartered Bank Commodities Research Head Paul Horsnell, analysts at the company, including Horsnell, revealed that Standard Chartered’s machine learning oil price model, SCORPIO, is predicting its biggest ever week on week loss.
“For Brent settlement on 5 August, SCORPIO is indicating a week on week fall of $2.86 per barrel, the largest week on week decline it has indicated in the 18 months it has been running,” the analysts stated in the report.
“SCORPIO attributes $1.11 per barrel of that fall to a variety of technical indicators. We think that if SCORPIO is picking up an outsized negative contribution from technicals, it is likely that most of the Commodity Trading Advisor (CTA) black boxes are sellers at the moment,” they added.
“Add the CTA black-box effect to a seasonally quiet late-July/early-August market with relatively low-liquidity and an absence of fundamentally driven oil traders prepared to take on risk right now, and the stage is set for a short-term environment in which algorithms are likely to be more than usually dominant,” they went on to state.
In the report, the Standard Chartered analysts said oil prices have weakened significantly, highlighting that front-month Brent reached a seven-week low of $78.43 per barrel in early trading on July 30.
“The contract settled at $79.78 per barrel on 29 July, a week on week fall of $2.62 per barrel and the first sub-$80 per barrel settlement since 7 June,” the analysts stated in the report.
“We think the renewed slide is primarily due to low seasonal liquidity combined with extremely negative market technicals and a sudden worsening of sentiment across the commodity complex,” they added.
The analysts noted in the report that they do not think the weakness is due to poor fundamental oil data.
“The latest Energy Information Administration (EIA) weekly data was the most bullish in over a year … While recent global balances have been weaker than we had expected, the resultant monthly stockdraws for late Q2 and Q3 are still a hefty 1.5 million barrels per day,” they said.
“While these draws are around 0.5 million barrels per day less than our prior expectation, the gap would not usually be considered large enough to move the needle for prices significantly; and most particularly it would not be expected to cause the $9 per barrel price slide of the past three weeks,” they added.
The Standard Chartered analysts pointed out in the report that not all current technicals are necessarily negative.
“Perhaps the most powerful in terms of their current influence are triangle patterns based on declining ranges,” they said.
“While most technical traders would currently lean towards the view that those patterns herald a sharp move lower, should some key resistance levels hold the triangles could (on a technical basis) set the market up for a significant break higher,” they added.
“For those traders using a more mixed strategy, we have found few who believe sub-$80 per barrel Brent can be sustained on a fundamental basis, but we believe the same traders are almost unanimous in the view that seasonal and technical market dynamics could still cause a temporary severe downwards move,” they continued.
In the report, Standard Chartered forecasts that the ICE Brent nearby future price will average $106 per barrel in the fourth quarter.
A Bofa Global Research report sent to Rigzone this week noted that “oil’s Bermuda triangle is nearing an end”.
“Oil prices have been trading in a narrowing range, or a triangle pattern, for over a year now,” the report stated, adding that a triangle pattern is technically synonymous with a compressed coil or spring.
“When it becomes too tight and what’s holding it lets go, a sharp and sudden breakout trend occurs,” the report noted.
In an oil and gas note sent to Rigzone on Tuesday, Macquarie strategists outlined that oil was “falling on macro and technicals” and warned that fundamentals are “set to drive further downside”.
“Despite the recent pullback, it would not surprise us if prices find support from summer draws through the end of August before beginning a multi-month pullback due to large 4Q24 surpluses,” the strategists stated in the note.
“That said, the odds may be increasing that the market is looking past the remainder of the summer and beginning to price large surpluses from 4Q24 through 2Q25,” they added.
“Key drivers of our surplus balances are accelerating OPEC+ and U.S. supply growth starting in October, weak diesel and softening jet fuel demand growth, and a larger than normal fall T/A season,” they continued.
In the note, the Macquarie strategists said crude is “now below the 200D moving average due increasing global macro and demand concerns”.
“Concurrently, positioning for crude has become increasingly bearish with managed money length falling by a combined 73k contracts for WTI and Brent,” they added.
“We believe recent liquidation is being driven by macro and algorithmic flows as demand from China, the world’s largest crude importer, posted its slowest economic growth in five quarters,” they went on to state.
The strategists also stated in the note that, alongside a weakening demand growth picture, physical Brent has also softened.
“Dated versus ICE Brent fell by $1.52 per barrel over the last two weeks,” they added.
“The reduction in physical tightness is partially attributed to increased U.S. exports into NWE in July as MEH’s premium to WTI improved. WTI cargo resales by Dangote have also softened global sweet balances,” they continued.
Macquarie’s strategists highlighted in the report that both WTI and Brent speculative net length fell over the previous week.
“WTI net length dropping by 21.7K while Brent decreased 21.2K,” they said.
“WTI spec net length retreated driven by over nine times the decrease in longs as drop in shorts. Brent recorded a slightly smaller move with over six times the amount of long liquidation than short covering,” they added.
“Lastly, commercial participants increased length for both WTI and Brent, totaling 35K contracts,” they continued.
To contact the author, email andreas.exarheas@rigzone.com
