Head of Commodity Strategy
Key points
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
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
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Quarterly Outlook
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Head of Commodity Strategy
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Head of FX Strategy
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
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Head of Commodity Strategy
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