Oil’s under-the-hood signals tell tale of bullish market

THE global oil market has gone from languid to lively in the space of a few weeks, with Brent futures blowing past the key US$90-a-barrel threshold as critical gauges flash steadily more bullish signals.

The surge in headline prices – with Brent now up 18 per cent this year – has been driven by a combination of supply constraints including Opec+ curbs, robust demand, and wider geopolitical risks, especially in the Middle East. Many refined-product markets are also strong, with petrol posting big gains.

As traders weigh the possibility that US$100-a-barrel crude could make a comeback, the momentum is diverting their attention from the possibility of a cease-fire in the Middle East, as well as the impact of higher prices on refinery margins. Here’s a rundown of the main indicators that are painting a more rosy picture for bulls.

US$100 options

Options markets have taken on a stronger tone as geopolitical tensions ratcheted higher, with Teheran vowing retaliation against Israel after an airstrike killed an Iranian general. Call options, which profit when prices rise, are trading at a rare premium to bearish puts, and volumes for protection against a spike in prices – even beyond US$100 – have surged.

“What is underpinning the move is financial markets,” Ed Morse, a senior adviser at Hartree Partners, said in a Bloomberg Television interview. “With the rise in tensions in the Middle East, there certainly is an increase in call buying for Brent.”

Spreads surging

The shape of the futures curve is now pointing to strength. The spread between the nearest two December contracts, a favoured trade for speculators, is back to the widest since October.

That represents increasing confidence in a tight market, something that’s also supported by firmness in pricing signals at the key US hub in Cushing, Oklahoma. There, nearby prices recently traded at large premiums to later ones, while the so-called WTI cash roll traded outside of its usual window, suggesting inventories are unexpectedly low.

Technical signs

Following its breakout from the narrow range early in the year, Brent’s technical picture looks much more solid. On Thursday (Apr 4), the global benchmark’s 50-day moving average topped its 200-day counterpart for the first time since August. That pattern could spur additional buying from trend-following funds. Prices may also be forming a double-bottom that could pave the way for US$112, Bank of America analyst Paul Ciana wrote in a note.

However, Brent’s run of gains have also lifted its 14-day relative-strength index above the level of 70, a threshold that suggests to some traders the advance has been too swift and a pullback may be due.

Funds buying

Money managers have been piling into bullish bets on oil as indicators improve, with positioning in Brent at a fresh 13-month high and positioning in US crude at the most bullish in about six months. Trend-following algorithmic traders, known as CTAs, are now estimated to be as long as they can be in crude futures, although that can leave the market vulnerable to some short-term selling.

“Unless WTI crude prints a new high, CTA trend-followers could now be set to offload some recently added length,” said Daniel Ghali, a commodity strategist at TD Securities. “Imminent buying exhaustion could easily morph into selling activity in crude oil markets.”

ETF inflows

Flows into commodity markets more broadly have also been turning positive for the first time in months as US inflation gauges remain elevated. Broad-based commodity exchange-traded funds (ETFs) pulled in cash in March for the first time in five months, while the largest cross-commodity product has seen a run of inflows as traders dip their toes back into markets for raw materials.

Product margins

As crude prices advance, traders are increasingly focused on the profits refineries make from turning crude into fuels. Petrol has been the runaway product in recent months, with benchmark futures about 33 per cent higher this year, as refining margins also rally above seasonal averages.

Still, some traders see a hint of caution in naphtha – a product that’s used to make plastics. In both Asia and Europe, margins for the fuel are at five-month lows, making that one indicator that’s offering a red flag even as prices continue to power higher. BLOOMBERG