Head of Commodity Strategy
Summary: Having spent the past three months rangebound within a 12-dollar range WTI crude oil is once again challenging key resistance in the $80 area, while Brent faces a steeper climb to its $85 resistance level. The alternating market focus seen in recent months helped create a very difficult trading environment with directional bets by speculators failing on several occasions, forcing trading positions to be adjusted on a regular basis, thereby triggering moves that found little fundamental justification. However, in recent weeks the market has been supported by ongoing Red Sea disruptions and emerging signs of tightness.
Having spent the past three months rangebound within a 12-dollar range around $74/b, WTI crude oil is once again challenging key resistance in the $80 area. Brent, similarly, confined around $79, faces a steeper climb to its $85 resistance level. During this time prices of both have struggled to gain momentum with geopolitical concerns and OPEC+ production cuts offsetting demand concerns, not least in China, the world’s top importer of crude.
This month has, however, seen a strong rebound, initially supported by fuel market tightness leading to higher refinery margins, or so-called crack spreads. Not least diesel prices which found support after global stock levels fell below their seasonal averages, supported by refinery disruptions in Russia amid Ukraine drone strikes, and not least continued attacks by Houthi 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.
While some of that support has faded with crack spreads easing, crude oil has nevertheless managed to maintain a bid amid continued Red Sea worries and signs the crude market has started to tighten up. The alternating market focus seen in recent months helped create 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, thereby triggering moves that found little fundamental justification.
However, in the latest reporting week to February 13, money managers showed an increased belief in higher prices, not least in Brent, the global benchmark, after they boosted their outright long positions to the highest level since October 2021 while the net position reached an 11-month high at 276k contracts or 276 million barrels. Positioning in WTI remains relatively weak with a net long at 116k contracts, some 44k contracts above a five-year low reached just before the Red Sea crisis began in early December.
The price difference between monthly contracts has been widening, indicating a more robust outlook across parts of the physical market. The three-month spreads shown above for WTI and Brent have both widened to around a $2 per barrel backwardation, highest since October, and up from a -$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 while a Qatar attempt to broker ceasefire deal between Israel and Hamas has so far been fruitless. In addition, ahead of the OPEC+ meeting in early March, the group’s effort to trim output seems to be successful.
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 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 $80, the result of which, could see it target $81.37 followed by $82.56.
For a closer look at the technical perspective for WTI and Brent, please check out this latest update from Kim Cramer, our technical analyst.
Commodities articles:
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
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
Previous "Commitment of Traders" articles
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
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
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
