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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Crude oil: China demand threat vs another OPEC+ cut
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil made a sharp U-turn on Monday with Brent and WTI finding a bid following a near 19-dollar drop since early November on continued and escalating concerns about the demand outlook in China. Forcing the change in direction was increased speculation that OPEC+ faced with the risk of a deeper, and in their opinion unwarrented slump, would consider deeper supply cuts when the group meets next week.
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Crude oil made a sharp U-turn on Monday with Brent and WTI finding a bid following a near 19-dollar drop since early November on continued and escalating concerns about the demand outlook in China as protests against the country’s Covid-zero strategy spread. The slowdown in demand from China will be temporary but having unsuccessfully fought Covid outbreaks with lockdowns for months, the prospect for an improvement looks month away and with the added risk of an economic slowdown reducing demand elsewhere, traders have increasingly been forced to change their short-term outlook.
Before Monday’s turnaround both Brent and WTI crude oil had seen an increased amount of technical and momentum selling from money managers, and during a three week period to November 22, the total net long was cut by 31% to 310k lots, a three-month low. Hardest hit has been Brent crude which in the week to November 22 saw money managers cut bullish bets by one-third or 71k lots to 138k lots. This the sixth biggest weekly reduction on record cut the net long to a 3-month low and second lowest of the year.
Prompting this loss of momentum and long liquidation has been a return to contango at the front end of the futures curve. The current prompt spread, being Jan23 and Feb23 traded as low as -70 cents on Monday, a level that was last seen in May 2020 during the peak pandemic scare.
What prompted the latest turnaround which so far has seen Brent recover 5% from Monday’s low point near $80 per barrel has been fresh speculation that OPEC+ may consider an additional production cut on top of the 2 million barrel per day for November that was agreed at their latest meeting.
With Russian oil production struggling amid sanctions, an additional cut for December will once again primarily be carried out by the four major Middle East producers of Saudi Arabia, UAE, Kuwait and Iraq. The meeting will be clouded by uncertainty given the unfolding developments in China, the EU embargo on Russian seaborne crude oil sales also beginning next week while the US treasury market is pricing in a near certain recession emerging in the US sometime next year. Ultimately the group, led by Saudi Arabia is looking for price stability, preferably in the 90’s for Brent, and with that in mind a strong signal of support or an actual cut in production can not be ruled out.
Technical update on Brent crude oil from Kim Cramer, our Technical Analyst. The update also takes a closer look at WTI crude oil, Dutch TTF gas and Henry Hub natural gas.
During yesterday’s session Brent Crude oil broke below support at $83.65 and the 0.786 Fibonacci retracement at $81.43 but later on managed to close above, thereby forming a Hammer candle which potentially could signal a bottom and reversal. A bullish candle today could signal a reversal from the current downtrend, signaling a recovery to around $92.32, the 0.618 retracement of the November selloff. However, to reverse the overall medium-term bearish picture a weekly close above $99.56 is needed. The RSI, currently in a downtrend is showing negative sentiment with a break above potentially signaling a reversal that could see crude oil prices move higher. Renewed selling taking Brent below $82.40 could trigger an downward extension to $77 or possibly lower.
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