Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Weak demand focus steers crude towards key support
Ole Hansen
Head of Commodity Strategy
Key points
Demand worries keeps crude on the defensive
An October production increase from OPEC+ looks increasingly unlikely
Speculators potential a supportive force following weeks of selling
EIA's weekly crude and fuel stock report and Friday's Powell speech in focus
The crude oil market sentiment remains under pressure as China's economic slowdown and the rapid adoption of EVs and hybrid cars reduce fuel demand, leading to lower refinery runs and diminished oil demand. Refinery margins, the key driver for crude demand, remain weak in Europe and the USA, making it increasingly unlikely that OPEC+ will begin to unwind voluntary cuts from October.
Brent crude dropped to key support around USD 75 on August 5, when a surging Japanese yen triggered an across-asset deleveraging selloff as volatility spiked. It later recovered as global markets rebounded and Iran threatened retaliation against Israel. Although the threat persists, the lack of action has shifted the market’s focus back to the softening demand outlook. After a three-day decline, Brent is again hovering precariously close to levels that need to hold to avoid a technically driven extension to the downside.
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 USD 83.30. The group has managed to stabilize prices, but in doing so, has also supported increased production from non-OPEC+ members. Given the current circumstances, this makes it challenging for the group to increase production and regain market share without negatively impacting prices.
Looking ahead, the potential for a US rate cut next month, signaling the start of a rate-cutting cycle that may see the Fed Funds rate drop by around 2% toward a neutral rate near 3%, could help spur fresh demand and optimism. With that in mind, crude traders will also be watching Fed chair Powell’s speech at Jackson Hole on Friday for signs that the FOMC indeed is moving towards a cut next month. Additionally, months of speculative selling have reduced bullish bets to levels that previously triggered a buying response, particularly in Brent, where speculators recently cut their net long to a record low before a recovery last week.
Despite a slight rebound in positioning during the week to August 13, large speculators such as hedge funds and CTAs remain cautious due to weak momentum and fundamentals. The three major fuel contracts have seen selling, with net short positions in ICE gas oil and NY Harbor ULSD (both diesel), while the RBOB gasoline net long hovers near a seven-year low.
Later today at 14:30 GMT, traders will be closely monitoring the EIA's weekly crude and fuel stock report, with surveys indicating a potential price-supportive drop in crude stocks, as well as reductions in gasoline and distillate stocks. Stock levels at Cushing, the delivery hub for WTI crude oil futures, will also be closely watched, as an expected weekly drop could bring stock levels closer to a five-year seasonal low, potentially supporting the spot price and narrowing the discount to Brent.
Recent commodity articles:
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials
8 Aug 2024: Sentiment-driven crude sell-off eases, allowing traders to focus on supply risks
7 Aug 2024: Limited short-selling interest observed during copper's recent aggressive correction
6 Aug 2024: Video: What factors are fueling the current market turmoil and gold's response
5 Aug 2024: COT: Broad commodities sell-off gains momentum; Forex traders seek JPY and CHF
5 Aug 2024: Commodities: Position reduction in focus as volatility spikes
2 Aug 2024: Widespread commodities decline in July, with gold as the notable exception
31 July 2024: Crude's month-long slide halted by fresh Mideast worries
30 July 2024: Record demand explains gold's current resilience
29 July 2024: COT: Energy and metals selling cuts hedge fund long to four-month low
4 July 2024: Sluggish US economic indicators boost demand for gold and silver
4 July 2024: Podcast Special: Quarterly Outlook - Sandcastle Economics
2 July 2024: Quarterly Outlook - Energy and grains in focus as metals pause
1 July 2024: COT: Crude long builds ahead of Q3 while grains selling accelerates
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