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Oil price stuck in neutral despite underlying strength
Commodities 5 minutes to read
Ole Hansen
Head of Commodity Strategy
Summary: The WTI and Brent crude futures contracts continue to trade within relative narrow ranges with the technical-driven trade the focus at a time when the fundamental drivers have struggled to dictate the direction of prices. Some underlying fundamental strength has emerged this month with widening price differences between monthly contracts indicating a more robust outlook across parts of the physical market. Today, the market will be watching EIA's weekly crude and fuel stock report after the API reported a bigger-than-expected increase in crude stockpiles.
The WTI and Brent crude futures contracts continue to trade within relative narrow ranges, in WTI between USD 76 and 80, and Brent between USD 81 and 84, with the technical-driven trade the focus at a time when the fundamental drivers have struggled to dictate the direction of prices.
Overall, we maintain the view Brent and WTI will likely remain rangebound, respectively around USD 80 and USD 75 per barrel during the first quarter and next, but with disruption risks in the Middle East and OPEC+ production restraint potentially leaving the risk/reward skewed to the upside. In the short term, the market will be focusing on WTI and whether traders will be successful in pushing the price through resistance just below USD 80, a level that was unsuccessfully challenged last week. Brent, meanwhile, has got more work to do before potentially attempting a breakout, with the level to watch for that to happen being somewhat higher at USD 85.
Some underlying fundamental strength has emerged this month with widening price differences between monthly contracts indicating a more robust outlook across parts of the physical market. An example being the three-month spread for Brent, which has widened to around a USD 2.25 per barrel backwardation, highest since October, and up from a -USD 0.5 per barrel contango at the start of the year. In the short term, focus remains on the Red Sea where Houthi attacks continue and next week’s OPEC+ meeting which is expected to yield an extension beyond March of the current agreement to keep production curtailed.
Ongoing attacks on ships in the Red Sea seem to be partly to blame, with a crude analyst at Kpler saying that oil stockpiles in developed nations have tumbled to the lowest seasonal level in at least four years after Red Sea attacks led to some tankers avoiding the waterway, keeping crude in transit for longer, thereby swelling the volume held at sea to the highest in six months, according to data from Vortexa Ltd via Bloomberg.
A two-day rally earlier this week that followed an equal slump last week was halted last night after the industry-funded American Petroleum Institute reported an 8.4 million barrel increase in nationwide stockpiles. Later today, the EIA will publish its weekly report with surveys pointing to a 3.4 million barrel increase. I will post the results of the EIA report on X at @ole_s_hansen once published at 14:30 GMT.
Below chart shows speculators positioning in crude oil based on weekly Commitment of Traders reports from the CFTC and ICE Europe. The latest update covering forex and commodities can be found here
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