Head of Commodity Strategy
Key points
Brent crude oil trades back above USD 80 per barrel, having once again managed to bounce ahead of key support in the USD 75 area. Recent weakness was driven by demand fears, especially in China, the world’s top importer of crude, leading to lower refinery runs and diminished oil demand. Refinery margins, the key driver for crude demand, remain weak as well in Europe and the USA, leading to lower prices, potentially worsened by the prospect for rising non-OPEC and, not least, OPEC+ supply as the group begins to unwind voluntary cuts.
However, since the weekend when Israel and Hezbollah exchanged fire, the price has found fresh support, which was strengthened further on Monday when the risk of an actual disruption, not just the fear of one, helped boost prices. This after Libya’s Eastern government said it would stop all oil production and exports, as the struggle with its Tripoli-based rival for control of the central bank and the nation’s oil wealth heats up. This potentially threatens another conflict which, during the past decade, has seen production from this oil-rich nation gyrate between near-zero barrels to around 1.2 million barrels per day.
In the last year, Libya produced an average 1.13 million barrels per day, with the bulk of the production coming from the oil-rich east, which is now being shut in. Depending on the duration, a reduction of this magnitude will help tighten a fine-tuned market, leaving the door wide open for OPEC+ to go ahead with a planned October production increase. Since October 2022, when OPEC+ announced a 2 million bpd production cut amid concerns about potential oversupply and economic uncertainty, Brent crude has traded mostly sideways, averaging around USD 83. The group has managed to stabilise prices but, in doing so, has also supported increased production from non-OPEC+ members.
The jump in Brent to around USD 81 has primarily been driven by short-term supply worries, leading to short-covering from hedge funds who primarily trade the front end of the futures curve, thereby driving up the premium the prompt futures contract trades above the next month. At the same time, the weak demand outlook, especially for diesel, has driven down refinery margins across the world. It highlights an oil market that, without a prolonged Libyan supply disruption, may struggle to move much higher, with the mid-80s potentially providing a ceiling for now.
From a technical perspective, Brent remains stuck in a wide range that continues to offer support near USD 75, while the upside, for now, seems capped at the 200-day moving average, last at USD 82.30, ahead of USD 85 and USD 88. In the week to 20 August, large speculators, such as hedge funds, held a near-record low bullish belief in higher crude oil prices, and as the technical outlook shows signs of improvement, they may end up providing some tailwind to the current rally. Overall, however, as mentioned, we continue to see limited upside beyond USD 85 per barrel as the weak demand outlook and ample OPEC+ spare capacity offsets short-term supply risks.
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Chief Investment Strategist
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Head of Commodity Strategy
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy
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