For all the bullish talk about tight supplies next year if the global economy skirts renewed recession, and occasional sharp short-covering rallies, benchmark oil prices are softening. In the past six months, each of a series of sharp shortcovering rallies has pushed the front-month Brent futures contract to peak at a lower level than the previous one:
$127 on April 11, $126 on April 28, $121 on June 15, $120 on Aug. 1, $116 on Sept. 8, $114 on Oct. 14 and now $112 on Oct. 27. Gradual subsidence in prices is not confined to nearby futures contracts. The same pattern of successively falling peaks is evident in the price of contracts for deferred delivery in Dec 2012 and Dec 2013 .
It stands in marked contrast to the continuous uptrend in prices through 2009 and 2010, which culminated in April 2011, in which each temporary peak was higher than the last (with one limited exception in the late spring of 2010).
Prices have eased despite several potentially bullish factors:
(1) Reported tightness in the cash market evidenced by premiums for quality crude and steep backwardation in the Brent forward curve;
(2) The Fed's commitment to keep interest rates lower for longer and attempt to pull down long-term rates;
(3) Rallying equities;
(4) Continued demand growth in Asia; and
(5) Warnings from prominent forecasters at major commodity banks about continued upside price risks from a tightening supply-demand balance in 2012.
Hedge funds and other money managers remain convinced oil prices will rise. The ratio of money managers with long positions in WTI-linked futures and options to those running short positions remains at three to one, according to data released by the U.S. Commodity Futures Trading Commission (CFTC).
For Brent futures and options, the long/short ratio is 1.77:1, according to Intercontinental Exchange ( ICE), lower than earlier in the year but still bullish.
Physical traders are also bullish. "Bullish physical oil traders, who have been warning for months of a tightening market, have so far won the game against bearish macroeconomic hedge funds," as my colleague Javier Blas wrote in the Financial Times last Tuesday ("Swing in WTI price curve leaves oil traders reeling", Oct 25).
U.S. equity markets have also been doing well recently. But benchmark seaborne crude prices have been largely left on the sidelines during the relief rally.
