Fund selling exacerbates softening crude outlook

Fund selling exacerbates softening crude outlook

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Key points

  • Crude oil trades near a two-month low as hedge funds selling adds to a softer outlook
  • The geopolitical risk premium deflates as the risk of a disruption remains very limited
  • Timespreads, inventory levels and lower refinery margins all point to softer fundamentals

Crude oil, in a downtrend since early April, trades near a two-month low with Brent retracing half the USD 20 rally that started back in December when Houthi attacks on ships in the Red Sea, and the war between Israel and Hamas help lift the geopolitical temperature, and with that concerns the conflict would spread and eventually cause disruption to supplies from key producers in the Middle East. However, while the war is ongoing the risk of a disruption is increasingly being put to near zero, not least helped by ongoing international efforts – however difficult - to find a path towards a ceasefire.

The slump is currently being exacerbated by selling from wrong-footed hedge funds exiting long positions that were entered during the strong momentum-driven, and fresh technical selling from traders looking for a downward extension following last week’s breakdown and subsequent drop below the 200-day moving average, currently at USD 84.42 per barrel.

The failure to hold onto the USD 90 handle, which is expected to be the preferred price area for most OPEC+ producers, and faced with a loosening fundamentals as seen below, the prospect for a prolonged period of production curbs further eroding market shares are becoming a reality. At this point, however, we only see a limited risk of Saudi Arabia and friends being forced once again to defend their price line in the sand, somewhere below USD 75 per barrel

Source: Saxo

Selling from hedge funds, often positioned in the front-month contracts of WTI and Brent where liquidity is the greatest, has helped push prompt spreads sharply lower, thereby supporting the weakening fundamentals narrative. While speculative selling has helped create a weakening narrative, there is no doubt that key oil market indicators have been turning softer in recent weeks. We are seeing that in the mention fall in timespreads, which act as a gauge of market strength/weakness, and not least in refining margins which have all softened around the world, while inventories have risen.

Global demand growth this year is still expected to rise above the historical trend, and unless we see downgrades to those, amid an unexpected worsening of global growth expectations, we see Brent crude return to trade closer to USD 90 per barrel into the 

Later today, EIA will publish their weekly crude and fuel stock report, and recent releases have added to the downside pressure with rising US stockpiles compounding the weaker outlook. In addition, implied gasoline demand from US motorists has also been showing some weakness ahead of the peak summer driving season. Today’s oil market weakness was given an additional boost after the American Petroleum Institute reported an across the board rise in crude oil and fuel stock. The report will be released at 1430 GMT and as per usual I will post the result on X at @ole_s_hansen

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore has not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

Please refer to our full disclaimer and notification on non-independent investment research for more details.
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-ch/legal/disclaimer/saxo-disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.