Oil buyers step in at $72/bbl: Is the downside limited?

2022년 11월 28일

The oil market has seen a lot of activity, with recent developments mostly easing worries about market tightness.

In China, Covid-related restrictions have been reinstalled in major cities, triggering rare protests and consequently reducing outlook for oil consumption, in striking contrast to perceived moves to reopen the economy at the beginning of November.
On the supply side, reports that the United States granted Chevron Corp permission to restart oil production in Venezuela, as well as Iraq's statement that it will add 1 million to 1.5 million barrels per day of oil export capacity by 2025, weighed on oil prices.

The oil future curve is no longer in a backwardation state. The price premium that spot WTI held over its future contracts (3A1!; 4A1!; 5A1!) has been fully wiped away by the most recent leg of oil depreciation. In essence, the spot price of oil is currently trading at par compared to its 6-month future delivery, indicating that the market is not currently concerned about prompt supply.

This condition has not been observed since January 2021, and it may be prudent to be wary of surprises at this time.



Bad news is priced, but positive catalysts are still to come?


With most bad news already priced in by the market, it may take something new to stop oil prices from falling. In October, the US White House signalled that it intends to repurchase crude to replenish its SPR stocks when WTI prices are at or below about 665/BBL and 72/bbl. Consequently, this area could present a strong price support and thus limit the downside relative to current market prices.

Additionally, supply-side risks have not completely disappeared. The G7 has postponed a price ceiling on Russian oil, but Russia said that it may retaliate, restricting supply, if the G7 applies a price cap. In view of recent market developments, OPEC+ could also reinforce its very restrictive supply strategy on Sunday, December 4th.

Dip buying to resume at $72?


Technically speaking, oil has revised its lows for 2022 and is currently experiencing a negative year-to-date performance.

The most recent wave of decline was dramatic, bringing the daily RSI close to oversold territory. In the past, massive selloffs in oil prices, with the daily RSI in oversold territory, produced some near-term price recovery. WTI prices are currently 14% and 30% below their respective 50-day and 200-day moving averages, which appears overly pessimistic considering the persistence of upside risks.

Given how sharp the recent downward trend was and the fact that a positive catalyst might happen soon, dip buying may start to come back at these levels.