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Oil Update—April 2022

This month’s update is nearly identical to that from last month in that I am unable to provide a forecast with any confidence.

China continues to battle COVID, Joint Comprehensive Plan of Action (JCPOA) negotiations still are unresolved, the market believes that the Fed will increase rates aggressively, Europe is considering sanctioning Russian oil, and the war in Ukraine continues to rage. These are just some of the key factors affecting oil prices. I find it impossible to provide a reasonable forecast range for the next month. As I stated last month, if I were to supply a range, it would be absurdly wide, which would render it useless. My expectation is that oil prices will continue to stay volatile and at elevated levels.

For those of you wanting to watch how the market perceives future rate increases, the CME Group provides a useful FedWatch Tool.

Europe has been wrestling with sanctioning Russian oil. It seems that progress is being made as evidenced by the April 28 Wall Street Journal article “Germany Drops Opposition to Embargo on Russian Oil” (subscription required).

BERLIN—Germany is now ready to stop buying Russian oil, clearing the way for a European Union ban on crude imports from Russia, government officials said.

Berlin had been one of the main opponents of sanctioning the EU’s oil-and-gas trade with Moscow.

However on Wednesday, German representatives to EU institutions lifted the country’s objection to a full Russian oil embargo provided Berlin was given sufficient time to secure alternative supplies, two officials said.

John Kemp wrote the Reuters article “Oil prices paralysed between Russia sanctions and China lockdowns: Kemp” where he stated:

The combined net long position of 553 million barrels is in only the 39th percentile for all weeks since 2013 while the ratio of long to short positions at 4.59:1 is somewhat higher in the 59th percentile.

Fund managers remain moderately bullish about the outlook for prices but extreme volatility has made it risky and expensive to maintain existing positions or initiate new ones.

Reflecting higher margin calls, the total number of open futures positions for all categories of trader is the lowest for seven years, although it has stabilised in the last fortnight after falling sharply since mid-February.

His statements that the number of open contracts is extremely low implies that oil prices may whip around on lower volumes than are typical.

As stated, I believe oil prices will stay volatile at elevated levels. If pressed further, I am inclined to think West Texas Oil prices will climb, in the months ahead, above the current price of about $105 per barrel.

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