Demand concerns have triggered a massive liquidation in oil positions by financial investors. The UBS Chief Investment Office (CIO) continues to advise risk-taking investors to add long positions in longer-dated oil contracts in Brent or to sell Brent’s downside price risks.

Over the last two weeks, non-commercial accounts have cut their net length in aggregated Brent and WTI futures as well as their options holdings by about 107,000 lots combined, equivalent to 107mn barrels. Going back to 2011, larger drops have only happened in 38 occasions. The biggest drop over two weeks was in March 2020, when the COVID-19 pandemic started to weigh on oil demand and the OPEC+ deal fell apart. Net length now stands at the lowest level since November 2020. We have highlighted in previous reports that oil demand concerns due to recession fears, a stronger USD, and the unwinding of the “oil inflation hedge” have triggered the liquidation.

But while oil demand in OECD countries has been lackluster lately, it’s been strong in non-OECD countries—especially China, India, and Mexico. Meanwhile, oil inventories are still at multi-year lows and short-term available spare capacity is set to fall below 2mbpd in August. And following the meeting between the US and Saudi leaders over the weekend, we learned that OPEC+ will only open the taps if the market conditions warrant it.

Preliminary data on Russian crude exports suggest a further drop in crude exports this month. With Europe cutting their Russian crude and oil product imports from nearly 3mbpd in June toward zero by year-end, we continue to expect a further tightening of the oil market, warranting higher oil prices.
Source: UBS