Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Crude oil supported by tightening fuel outlook
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil prices continue to gyrate while staying mostly rangebound with the directional input being driven by the alternating focus between demand concerns weighing on prices and support from a not yet and most likely very limited risk of a supply disruption in the Middle East, and OPEC’s efforts to support higher prices. While the crude oil market remains rangebound the fuel product market is showing some emerging strength with refinery margins on the rise, not least diesel prices which are being supported by global stock levels falling below their seasonal averages.
Crude oil prices continue to gyrate while staying mostly rangebound with the directional input being driven by the alternating focus between demand concerns weighing on prices and support from a not yet and most likely very limited risk of a supply disruption in the Middle East, and OPEC’s efforts to support higher prices. The combination of these has for the past few months created a very difficult trading environment with directional bets by speculators failing on several occasions, forcing trading positions, both long and short, to be adjusted on a regular basis.
The last couple of weeks has been a classic example of this with prices surging above previous resistance levels following an attack on US forces in Jordan by Iranian backed militants, only to deflate after the US adopted a measured response and a Qatar mediated plan for a cease-fire in Gaza emerged. This roller coaster ride was in part fueled by technical buying from speculators leading to an end of January rapid accumulation of long positions before the slump back below $75 in WTI and $80 in Brent triggered another round of long liquidation.
Overall, we maintain the view Brent and WTI will likely remain rangebound, respectively around $80 and $75 per barrel during the first quarter but with disruption risks, OPEC+ production restraint, and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. The biggest downside risk being a disunited OPEC+ leading to a collapse in the current agreement to keep production down, and the upside from a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.
While the crude oil market remains rangebound the fuel product market is showing some emerging strength with refinery margins, or so-called crack spreads, continuing to rise. Not least diesel prices which are being supported by global stock levels falling below their seasonal averages. Distillate supplies, which includes diesel, jet fuel and heating oil, have been disrupted by Ukraine's drone attacks on petroleum refineries in Russia and by Houthi attacks on shipping in the Red Sea and the Gulf of Aden. The latter have led to the re-routing of east-west tankers from the Red Sea and the Suez Canal to the much longer route around Africa, in the process tying up millions of barrels of diesel and gasoil on the water for longer.
A three-day bounce in crude oil, driven by a combination of the mentioned support from rising fuel prices and hedge funds having finished exiting wrongfooted longs, was given some additional support on Wednesday after the US Energy Information Administration sowed doubt about the outlook for US production growth. In their monthly Short-term Energy Outlook (STEO) the EIA said it did not expect that the record production of 13.3 million b/d reached in December, and temporarily cut to $12.6 million b/d in January due to shut-ins from frigid weather, would be exceeded until February 2025.
The forecast stands in contrast to that of the International Energy Agency who sees continued non-OPEC supply growth being led by the US, Canada, Brazil and Guyana. Even OPEC in their latest update saw non-OPEC supply in 2024 rise by 1.34 million barrels/day with nearly half the increased coming from the US. Note: OPEC and IEA will publish their monthly reports next week on February 13 and 15.
With US production growth potentially stalling, the OPEC+ group of producers, currently keeping 2.2 million barrels/day off the market, should find it easier to manage production and support (higher) prices going forward, especially with global demand expected to rise around 1.5 million b/d, supported by a robust US economy and Beijing stepping up efforts to support the Chinese economy. For now, however, these developments do not alter our view that rangebound market conditions will prevail in the short-term.
Later today, the EIA will publish its weekly inventory report (insert below) and given the current strength in refinery margins, changes in gasoline and distillate stocks will be watched closely. According to the American Petroleum Institute (API) who released their report last night, the market can expect another sizable distillate draw being offset by an equal strong rise in gasoline stocks. If confirmed by the EIA it would drive gasoline stocks to a June 2020 high and distillates some 7% below the five-year average. Crude oil stocks meanwhile are expected to show a rise which will be in line with the seasonal behaviour.
WTI crude oil continues to trade within the uptrend that was established in early December when the Red Sea attacks began. However, the recent strong rally and subsequent steep decline highlights a market struggling for direction. The ascending trend line is currently providing support around $72.40 while a move above $74, the 21-day moving average, may signal a return to neutral.
Commodity articles:
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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