Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: Crude oil futures trade up +3% while gold has found a haven bid after Hamas’ attack on Israel raised concerns about stability in the Middle East, particularly with focus on Iran after the WSJ reported that Iran helped plot the attack over several weeks. The situation is tense and with some calling this Israel’s 9/11 moment, the risk of an escalation is still high as Israel and potentially also the US responds. But for now, with no clear impact on supply, the first buying response has been driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark.
Global Market Quick Take: Europe
Macro Digest: Middle East in Focus
Commodity Weekly (from Friday): Yield surge drives steep crude and gold correction
Crude oil futures trade up +3% while gold has found a haven bid after Hamas’ attack on Israel raised concerns about stability in the Middle East, particularly with focus on Iran after the WSJ reported that Iran helped plot the attack over several weeks. The situation is tense and with some calling this Israel’s 9/11 moment, the risk of an escalation is still high as Israel and potentially also the US responds. But for now, with no clear impact on supply, the first buying response has been driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark.
The market's foremost concern revolves around potential disruptions in supplies from regions like Iran. The ongoing conflict has the potential to worsen tensions between the involved countries, especially considering President Joe Biden's unwavering commitment to supporting Israel. At present, there is no immediate threat to the oil supply, but the market is understandably apprehensive. Often, market sentiment and concerns can exert greater influence than the actual underlying fundamentals.
Crude oil spiked $4 on the opening but for now with no impact on supply, Brent remains below $90 with the first buying response being driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark. Notably, one of the most significant surges in exports this year has apart from US shale, been attributed to Iran where production and exports have risen as the US turned a blind eye to Iran bypassing American sanctions. As the result its production has risen by close to 600,000 barrels during the past year while crude stored on- and offshore has been sold into market, thereby mitigating some of the tightness being orchestrated by Saudi Arabia and Russia. Should the spotlight turn towards Iran, there's a possibility of stricter sanctions being imposed, potentially leading to supply constraints and tightening conditions within the market.
In the week to October 3, hedge funds reacted to an emerging correction in crude oil by cutting their WTI and Brent long by 33k contracts to 525k, thereby making a first small reduction in the 170k contracts that was bought after Saudi Arabia and Russia said current unilateral production cuts would be extended until yearend. However, while the WTI long has increased by 235k to 307k since July 1, the Brent long has risen by just 58.5k to 218k, highlighting a market were tight supplies in the US, especially at Cushing, the important delivery hub, have supported buying of WTI while funds have kept a relative low interest in Brent with growth concerns partly offsetting current tight supply worries.
In our latest commodity weekly, published on Friday before the latest crisis erupted, we highlighted the tug of war between supply and demand, and the impact on prices of this alternating focus. However, the combination of fresh geopolitical risks and prices having returned to levels seen before last month’s announcement from Saudi Arabia and Russia about a production cut extension to yearend, the prospect for further price declines looks increasingly limited, with a break above $89 as per the chart below potentially triggering added momentum buying. In the short-term it’s all eyes on Iran and a potential response from Israel.