Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Access both platforms from your single Saxo account.
Crude oil higher on tightening supply as Iran sanctions bite
Ole Hansen
Head of Commodity Strategy
The battle between fears of a supply-crunch driven by Iran sanctions and a further collapse in Venezuelan production on one side and the future risk to demand as a result of a slowdown in global growth on the other is likely to keep the oil market rangebound for now.
Following some overnight weakness, crude oil is now trading higher ahead of the weekly stock report from the US Energy Information Administration. The main driver has been renewed threats from Iran concerning the Strait of Hormuz and comments from Fatih Birol, Executive Director of The International Energy Agency. Barol said that the combination of strong demand and unstable supply from the Middle East together with falling supply from Venezuela could see the oil market tightening into the year-end period.
Having broken back above $75/barrel, Brent crude oil is aiming to test the upper band of resistance between $78.50 and $80/b.
We maintain the view that in the short-term, the upside should provide the least amount of resistance. Tightening supply has seen the front of the Brent crude oil move back into backwardation and this development is likely to attract renewed demand from long-only funds while the threats by Iran to disrupt the flow of oil through the Strait of Hormuz could increase the geopolitical risk premium.
Continued dollar strength against major emerging market currencies, not least China and India, poses the biggest risk to this assumption. In that case, the market may choose to ignore a challenging supply outlook in the short term given the longer-term risk to demand from slowing growth.
In the week to August 21, just before the 4% rally last week, hedge funds sold crude oil for a third week with the combined Brent and WTI net-long falling by 31,000 to 664,000 lots, an 11-month low. The change was driven by long liquidation in Brent (-16,000) and fresh short selling in WTI (+15,000), the largest one-week rise for 10 months.
Staying on the subject of short-selling, it is interesting to see how limited the interest has been during the past year. Even between July and August when Brent crude oil dropped by almost $10/b, the gross-short (red lines) was kept almost unchanged and close to the lowest seen during the past five years.
With the sentiment once again having turned more bullish due to the increased risks to supply, the net-long is expected to build again. However, the clouded outlook for demand due to trade wars, dollar strength, and EM economies struggling with high debt and rising (dollar) funding costs, is likely to curb the buying enthusiasm relative to what was seen earlier this year.
Staying on the subject of short-selling, it is interesting to see how limited the interest has been during the past year. Even between July and August when Brent crude oil dropped by almost $10/b, the gross-short (red lines) was kept almost unchanged and close to the lowest seen during the past five years.
With the sentiment once again having turned more bullish due to the increased risks to supply, the net-long is expected to build again. However, the clouded outlook for demand due to trade wars, dollar strength, and EM economies struggling with high debt and rising (dollar) funding costs, is likely to curb the buying enthusiasm relative to what was seen earlier this year.
Later today at 14:30 GMT the EIA will release its “Weekly Petroleum Status Report”, providing data on domestic stocks and production levels as well as trade data for crude oil and products. Some temporary price weakness was seen overnight after the American petroleum Institute released its weekly report late yesterday, which showed a surprise albeit small increase in crude oil stocks. Surveys ahead of the EIA report point to a 1.5-million-barrel drop.
Latest Market Insights
Quarterly Outlook 2024 Q3
Sandcastle economics
-
-
Bonds: What to do until inflation stabilises
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.
-
Equities: Are we blowing bubbles again
Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.
-
FX: Risk-on currencies to surge against havens
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.
-
Commodities: Energy and grains in focus as metals pause
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)