Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Trader Strategy
Oil drops as Trump goes after Opec again
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil has reversed earlier gains following what looks to be a well-timed tweet from President Trump.
Early on Monday oil traded higher as broad-based risk appetite continued to be fed supportive news from the current trade negotiations. Overnight President Trump announced that he would delay raising tariffs on Chinese imports after “substantial progress” had been made. The Chinese, meanwhile, have been sounding less bullish after they warned about “new uncertainties”.
The recent rally in WTI and Brent crude oil towards $60/b and $70/b respectively has once again caught the attention of President Trump. In an early morning tweet he is once again going after Opec and asking the cartel to take it easy on production cuts, saying that the world is too fragile to handle price hikes at this stage. Last year similar tweet attacks on Sept 20 and Nov 12 on Opec and especially Saudi Arabia to do more was backed up by the surprise decision to grant waivers to several buyers of Iranian oil.
These developments helped wrongfoot the market and sent the price crashing towards the late December lows. I agree with the president that the global economic outlook is too fragile to handle rising oil prices at this stage. Crude oil has been rising lately, not due to strong growth and rising demand but primarily due to a politically orchestrated cut in production from Opec and friends. Whether this latest tweet will do the trick in halting the rally remains to be seen but some signs have already emerged to support a pause and potentially a reversal.
The front month contract, currently April, in both WTI and recently also Brent crude trades lower than the May contract. Such a scenario called contango is normally associated with a market being well supplied. The Opec+ production cuts have in other words so far failed to create the tightness needed to support a continued rally.
These developments helped wrongfoot the market and sent the price crashing towards the late December lows. I agree with the president that the global economic outlook is too fragile to handle rising oil prices at this stage. Crude oil has been rising lately, not due to strong growth and rising demand but primarily due to a politically orchestrated cut in production from Opec and friends. Whether this latest tweet will do the trick in halting the rally remains to be seen but some signs have already emerged to support a pause and potentially a reversal.
The front month contract, currently April, in both WTI and recently also Brent crude trades lower than the May contract. Such a scenario called contango is normally associated with a market being well supplied. The Opec+ production cuts have in other words so far failed to create the tightness needed to support a continued rally.
Speculators increased bullish Brent crude oil bets by 10.7k lots to 275k lots in the week to February 19. Seven weeks of buying, however, began to show signs of fading with fresh short-selling emerging last week. This despite the technical break above $64/b that was witnessed during the week in question. On the back of the this observation we suspect macro funds have started to fade (sell into) the current rally in the belief that economic headwinds may offset the positive impact of production cuts.
Macroeconomic uncertainties still exist but the drumbeat of worsening economic data has so far been difficult to hear amid all the hype about the potential positive impact of a trade deal. We suspect that most of the positive impact of a deal has been priced in. Not least considering that global stocks have almost returned to their pre-trade war level – an unsustainable level given the raised recession risk currently emerging across the world.
Macroeconomic uncertainties still exist but the drumbeat of worsening economic data has so far been difficult to hear amid all the hype about the potential positive impact of a trade deal. We suspect that most of the positive impact of a deal has been priced in. Not least considering that global stocks have almost returned to their pre-trade war level – an unsustainable level given the raised recession risk currently emerging across the world.
Having almost retraced 50% of the October to December sell-off Brent crude oil may now pause with a break below $64/b or above $68.3/b setting the stage for the next move. We suspect that the risk has been skewed to the downside with the latest tweet.
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