The worsening crisis in the euro zone and a shaky looking global economy are good reasons to worry about oil demand. But what started as an orderly correction to the crude price in April took on panic-like character at the end of last month. With investors now at their most bearish on commodities since 2009, and Iran tensions still festering, contrarians must be tempted.
It would take a brave investor to jump in now. The supply worries that seemed so acute when Brent crude tipped north of $126 a barrel in March have lessened as a result of a step-up in production by Saudi Arabia, cooler rhetoric over Iran’s nuclear programme and a bleaker economic outlook.
The price of the black stuff could fall further if Europe slides out of control. At just over $97 a barrel, today’s Brent price is still more than double the depths it plumbed in the aftermath of the 2008 crash. Analysts at Credit Suisse estimate the price could fall to $50 a barrel if euro zone turmoil culminated in a severe credit crunch.
Still, after a roughly 25 per cent slide in the oil price since March, there is a bull case to make for crude. On June 11, Goldman Sachs joined the optimists, pointing to a sharp fall in long positions in the broader oil market. A separate Bank of America Merrill Lynch survey found institutional investors at their most bearish on commodities since February 2009. Such measures of investor sentiment and positioning tend to act as contra-indicators for asset prices - with periods of extreme negative sentiment signalling a potential buying opportunity.
The latest data from the US Commodity Futures Trading Commission showed a one per cent increase in net long NYMEX crude oil futures and options positions held by money managers during the week to June 5 — the first uptick since the recent bout of panic-selling began last month. Whether brave or stupid, oil bulls are no doubt waiting in the wings, waiting for a flare-up in Iran tensions or signs of central bank easing to jump back in. Such is the volatility of the price movements, however, investors will need rapid reactions to take advantage.
