Brent Crawls Higher, Speculators Rush Back In

The Brent oil contract gained another 17¢ on Monday for its highest close in two years and has been creeping higher ever since it passed the $70 mark on Jun. 1 on bullish sentiment that sees oil demand outstripping supply. Speculators signal this rally has further to go and have increased their bets on higher Brent prices since they poured back into the futures market in late May, adding 30,000 contracts to their long positions, an increase of 8%. Speculators are also pouring into options on Brent futures contracts, where they are targeting the possibility that Brent breaches $75 per barrel all the way up to $100/bbl (OD Jun.7'21). Risk capital now has the equivalent value of $21 billion riding on higher Brent prices in futures contracts alone, up from $6 billion in early November, when the price rally started with Brent below $40/bbl. On ICE Futures, August Brent closed Monday up 17¢ at $72.86/bbl after an early-day rally petered out and Brent futures slid from an intraday high of $73.64/bbl in modest trading volumes. Meanwhile, the Nymex West Texas Intermediate (WTI) crude contract lost 3¢ on the day to close at $70.88/bbl. Demand Optimism Positive sentiment is being fed by assumptions that the Covid-19 pandemic can be controlled, consumers will start moving around more, oil inventories will continue to decline and producers will maintain their discipline. Higher oil demand is seen in Europe, where border restrictions are being eased, boosting demand for jet fuel. Pre-pandemic jet fuel demand in Europe was 1.45 million b/d; in recent months it was closer to 600,000 b/d. Anticipating higher demand for jet fuel, and an economic uptick in general, speculators have also latched on to the gasoil contract on ICE Futures in London – an equivalent of the diesel contract on Nymex in New York. Bets on higher gasoil prices on ICE have more than doubled since early November, when the rally started, to 165,000 contracts. Bets on lower diesel prices have dropped from over 75,000 contracts to just 7,000 lots. The rising trend in diesel bets is also visible in the US, but with less exuberance. While Europe sees bets on higher prices versus lower prices at 23-1, the ratio is just 2-1 in the US. Risk capital sees diesel as the last main market to rebalance from the Covid-19 pandemic after crude shed much of its surplus inventories from collapsed demand, followed by gasoline, naphtha and fuel oil. The forward curve for gasoil swaps in Singapore has moved into backwardation, and the prompt premium over later supplies signals that the Asian market is tightening for diesel, kerosene and jet. Rising product prices support the value of Brent and WTI. John van Schaik, New York