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 still looking for a break
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil remain stuck within an ascending channel and close to a five-month high . While other commodities have exhibited an elevated level of volatility this past month, crude oil has gone the other way as it struggles to respond to macro and oil related news. Monthly oil market reports from EIA and OPEC have so far provided little in terms of fresh input while today's EIA stock report is expected to show a price supportive drop in both crude oil and product stocks.
What is our trading focus?
OILUKOCT20 – Brent Crude Oil (October)
OILUSSEP20 – WTI Crude Oil (September)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)
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Our weekly crude oil update ahead of EIA’s Weekly Petroleum Status Report will be kept short to reflect the current market condition. Following the extreme volatility witness during the global lockdown back in March and especially April, the price of both Brent and WTI crude oil (chart below) have settled into a slightly rising channel.
Successful production cuts from OPEC+ ensured a strong rebound during May but since then the market has settle into a wait-and-see mode with easing production cuts so far meeting a pick-up in demand, strong enough to keep the market on a slight upward sloping trajectory. Adding to the support this past month has also been the weaker dollar and the continued level of raised risk appetite across market.
The market may also take some comfort from a recent pick up in ETF’s tracking oil and gas exploration and production. One of the biggest, the XOP:arcx broke above its 200-day moving average on Monday and is currently up by close to 10% on the month.
WTI crude oil is currently stuck within an ascending channel but close to a five-month high. Currently between $40/b and $44/b with the 200-day MA, which it has been battling for the past week, providing some local resistance at $42.8/b.
Monthly oil market reports from the EIA and OPEC – IEA due Thursday - have both been pointing to a slow recovery in global oil demand. OPEC in their report lowered global demand for 2020 by 9.1 million barrels/day with the latest surge in the coronavirus cases in the US as well as rising numbers in India, Brazil and Europe raising concerns while creating a difficult market to predict.
Speculative investment demand from hedge funds and CTA also reflects the lack of movement. For the past ten weeks, the combined net-long in Brent and WTI has stayed close to 550,000 lots (550 million barrels). This compared with a low of 183,000 lots in April and a 714,000 lots high in January, prior to the covid-19 outbreak becoming known outside of China.
Later today at 14:30 GMT, the U.S. Energy Information Administration will release its ‘Weekly Petroleum Status Report’. The higher prices seen today has been driven by the outlook for lower U.S. stockpiles. Not least after the American Petroleum Institute last night reported a 4 million barrel drop in crude oil stocks while products also saw bigger declines than expected in the surveys carried out ahead of the report.
If confirmed it will be the third weekly drop in crude stocks, but as the charts below highlight, we are not that many weeks away from the ending of the peak demand season. With crude and product stocks well above their seasonal average the market may struggle to digest negative surprises.
As per usual I will post results and charts on my Twitter handle @Ole_S_Hansen
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