Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Short-term gain, longer-term pain for crude oil
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil has settled into a relatively tight range above $80/barrel, with forecasts weighing short-term upside risks against the potential of slowing demand growth and rising non-Opec production.
Crude oil has settled into a relatively tight, $2/barrel range above $80/b. The break above this level last month helped trigger a rapid extension to almost $87/b on growing speculation that US sanctions against Iran could hit harder than previously expected. The risk of a return to $100/b received a lot of media attention, not least following bullish comments from two of the world’s biggest physical oil traders.
Since then, however, crude oil has returned to $80/b after a jump in US bond yields and the move lower in stocks; both highlighted the risk to global growth from rising yields, rising debt levels and the strong dollar.
In addition, we have seen unusual behaviour from hedge funds who, instead of buying into the strength as they normally do, turned net sellers. During the two-week period up until October 9, the combined net-long in Brent and WTI was cut by 71,000 lots to 757,000 lots, some 30% below the March record.
The fact that funds have been selling into the recent strength highlights involvement from macro-oriented funds who look beyond the current upside risk to prices and instead towards the increased risk of slowing demand growth and rising non-Opec production. In the very short term, the market positioning highlights the risk of a deeper correction below $80/b. However, given the not-yet-known impact on Iran’s ability to produce and export, we would see such an event as a buying opportunity.
The risks to prices from lower demand growth, trade wars, and rising non-Opec production are unlikely to impact the market until next year.
Later today at 14:30 GMT, the US Energy Information Administration will release its Weekly Petroleum Status Report. Oil received a small boost last night after the American Petroleum Institute said that crude stocks dropped by 2.1 million barrels last week instead of rising by 2.5m as per the most recent forecast. Crude stocks at Cushing, meanwhile, look set to rise for a fourth consecutive week as stock levels continue to recover after hitting a four-year low back in August.
US crude stocks continue to track close to their five-year average while the seasonal drop in refinery demand should see gasoline stocks rise further above its long-term averages. The combination of lower crude oil imports and rising exports saw US net-import drop to a record low of just 4.8 million barrels/day in the week to October 5. On a four-week average basis, it stood at 5.9m b/d, just a couple of hundred thousand barrels above the December 2017 low.
In our Quarterly Outlook published today, we highlight some of the reasons why Brent crude oil could finish the year anywhere between $75 and $95/b.
In our Quarterly Outlook published today, we highlight some of the reasons why Brent crude oil could finish the year anywhere between $75 and $95/b.
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