Head of Commodity Strategy
Summary: Crude oil trades lower for a third day with fresh selling emerging after prices failed to reach safer grounds earlier in the week when global stock markets and general risk appetite surged after an unexpected slowdown in US inflation once again increased bets that the Federal Reserve’s rate hiking cycle is over. While the current demand outlook looks robust accoding to IEA and OPEC estimates, the short-term risk of additional weakness can not be ruled out given continued selling pressure from momentum focused funds, but traders may also consider the risk of additional action to support prices from OPEC and non-OPEC when they meet on November 26
Weekly COT update: Crude oil long slumps; agriculture sector in demand
Crude oil trades lower for a third day with fresh selling emerging after prices failed to reach safer grounds earlier in the week when global stock markets and general risk appetite surged after an unexpected slowdown in US inflation once again increased bets that the Federal Reserve’s rate hiking cycle is over. The prospect for lower funding cost supporting liquidity intensive industries drove a strong rebound in some growth dependent commodities, but not crude and it highlights the current loosening of conditions.
The oil market focus has instead been turning to the short-term demand outlook which according to the futures market is showing signs of weakening. Most notable in WTI where the spread between the prompt delivery month and three months later has returned to a $0.2/bbl contango for the first time since July. The spread reached a $6.2/bbl backwardation back in late September when tight supply focus peaked following Saudi and Russian production cuts. The equivalent three-month spread in Brent is also toying with contango, having collapsed from around $5.7/bbl to the current $0.3/bbl.
All developments that have seen third quarter strength deflate rapidly with production cuts from Russia and not least Saudi Arabia having a limited impact on the market. From late June to late September Brent crude oil rallied by around one-third in response to Saudi production cuts amid a quest for higher prices and OPEC estimates of a 3 million barrel a day supply deficit, but since then the demand outlook has weakened, thereby forcing a strong sell reaction from speculators who got caught with a big long and the smallest gross short position in 12 years.
According to the latest COT (Commitment Of Traders) data from the CFTC (Commodity Futures Trading Commission) and ICE Exchange Europe covering the week to November 7, hedge fund selling of crude oil extended to a third week with the combined net long in WTI and Brent slumping to a four-month low at 312k contracts, down 44% since September when the focus on tight markets led by Saudi production cuts peaked before demand worries began taking over.
During the week, monthly oil market reports from OPEC and the IEA sent mixed signals, but overall, both agencies revised up their global demand growth forecast for this year, driven by upward revisions to 2H23 demand forecasts in the US and across non-OECD. Both also revised up their 3Q23 Chinese demand forecasts again, with the IEA seeing an annual growth around 1.8 million barrels per day. Turning to non-OPEC supply, all three agencies revised up 2023 supply growth on higher US and Brazil forecasts. A significant difference, however, was seen in supply from Russia which OPEC saw falling to 9.6 mb/d in 4Q23 while the EIA and IEA put production around 1 mb/d higher. Provided OPEC keep its production at October levels for the rest of the year, the sum of these balances implies a 1 to 3 mb/d global supply shortfall this quarter, more than enough to support prices.
These supply deficit forecasts received little attention given the current sentiment driven weakness where traders continue to adjust positions to reflect the current negative momentum. The latest weakness came after the EIA in their latest update covering two weeks worth of data reported a 17.5 million barrel increase in nationwide stockpiles with Cushing, the WTI delivery hub, seeing a 3.5 million barrel rise. During the same time, however, total inventories of gasoline (-7.9m bbl), distillates such as diesel and heating oil (-4.7m) and jetfuel (-3.8m) dropped by a combined 16.4 million barrels. Apart from implied gasoline demand rising to 9 mb/d, the highest level for this time of year since 2021, some support may also emerge from refineries coming out of maintenance. US refinery utilization rates rose for the first time in four weeks to 86.1% last week, still somewhat below the 92.9% rate recorded in same period last year, but overall rising refinery demand will eat into crude stocks and eventually help create a floor under the market.
WTI crude oil is currently stuck in a $75 to $80 range with the latest weakness being driven by fresh selling after the recent rebound failed to drive prices onto safer grounds above $80. In the short-term the risk of additional weakness can not be ruled out given the mentioned selling pressure from momentum focused funds, but traders may also consider the risk of additional action to support prices from OPEC and non-OPEC when they meet on November 26.
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